Mark Zandi, chief economist at Moody’s Analytics, told CNN that the US economy could be in recession at least one-third in the next 12 months.
“The risk of a recession is unpleasantly high and rising,” Zandy said.
Before Russia invaded Ukraine, economists wanted energy prices and overall inflation to cool this spring and summer. Inflation outlook is now bleak and prices for gasoline, food, metals and other raw materials are skyrocketing.
“It’s reasonable to be nervous here,” Zandy said. “Russia’s invasion and soaring oil and commodity prices have really changed things.”
Goldman Sachs economists said earlier this month that the chances of a recession in the United States next year have risen to 35%.
“Line that cannot be crossed”
Deteriorating inflation can force the Federal Reserve to do more to bring inflation down to healthy levels.
Consumer prices surged 7.9% in February, the largest 12-month surge in 40 years. However, the inflation report did not capture the effects of Russia’s invasion of Ukraine.
Mr Zandy said it is clear that the war in Ukraine is pushing up inflation expectations. This is an ominous development for Fed officials who wanted to ease inflation concerns. Central bankers become nervous when families and business leaders expect higher prices. It can be a self-fulfilling prophecy.
“It’s a line that can’t be crossed, which means the Fed has to be very aggressive,” Zandy said.
The Fed hasn’t done this since 1994
Morgan Stanley has joined many other Wall Street banks and said Thursday that the Fed expects to raise interest rates by 0.5 percentage points over the next two months. The Fed hasn’t done that in a series of meetings since 1994.
“The harder it is for the Fed to brake, the more likely it is that cars will be confiscated and the economy will slow down,” Zandy said.
The possibility of a slowing economy and self-sustaining expansion is still in favor of the Fed, Zandy said. “We need a little luck here. Pandemics and Ukraine can’t go the dark way,” he added.
In a speech earlier this week, Fed Chair Jerome Powell said in the past the US central bank was able to curb inflation without disrupting the economy. He quoted 1965, 1984 and 1994 as examples.
“I believe historical records provide an optimistic basis. Soft, or at least soft-like landings, were relatively common in US financial history,” Powell said. ..
Fear of stagflation
Former US Treasury Secretary Larry Summers is skeptical.
In a Washington Post editorial last week, Summers accused the Fed of being “hopeful and delusional thinking,” and what he saw as central bank inflation expectations chilling rapidly in the heated job market. I called it “absurdity.”
Summers has previously warned that federal policies have put the US economy on the road to a major recession and stagflation. This is a toxic combination of weak growth and high inflation that hurt the US economy in the late 1970s and early 1980s.
Zandy said stagflation is a “low probability” event. This is because the Fed does whatever it takes to avoid stagflation, including the end of recovery.
“If we look like we’re in stagflation, the Fed will drive us into recession,” Zandy said.