Recession risks are “uncomfortably high and rising,” says Mark Zandi.

The US economy has at least a one in three chance of plunging into recession over the next 12 months, Mark Zandi, chief economist at Moody’s Analytics, told CNN.

“Recession risks are uncomfortably high and rising,” Zandi said.

Before Russia invaded Ukraine, economists had hoped that energy prices and overall inflation would ease this spring and summer. Now the outlook for inflation has worsened, and the prices of gasoline, food, metals and other raw materials have risen sharply.

“It’s reasonable to be nervous here,” Zandi said. “The Russian invasion and the surge in oil and commodity prices really made a difference.”

Earlier this month, economists at Goldman Sachs said the likelihood of a recession in the United States next year had risen to 35%.

“The Line You Can’t Cross”

A worsening inflation picture could force the Federal Reserve to do more to bring inflation down to healthy levels.

Consumer prices rose 7.9% in February, the biggest 12-month jump in 40 years. But this inflation report does not reflect the consequences of the Russian invasion of Ukraine.

Zandi said it was clear that the war in Ukraine was raising inflationary expectations, an ominous development for Fed officials who had hoped to assuage inflationary fears. Central banks get nervous when families and business leaders expect price hikes because it could be a self-fulfilling prophecy.

“This is a line that cannot be crossed. This means the Fed needs to be very aggressive,” Zandi said.

The Fed hasn’t done this since 1994.

Morgan Stanley, joining a number of other Wall Street banks, said on Thursday that it expects the Fed to raise interest rates by half a percentage point over each of the next two months. The Fed hasn’t done this in back-to-back meetings since 1994.

“The more the Fed puts on the brakes, the more likely it is that the car will stall and the economy will go into recession,” Zandi said.

The odds are still in the Fed’s favor to force the economy to slow to self-sustaining growth, Zandi said. “We just need a little luck here. The pandemic and Ukraine cannot follow some dark path,” he added.

Fed Chairman Jerome Powell speech Earlier this week, it was noted that the US central bank has in the past been able to tame inflation without destroying the economy. He cited 1965, 1984 and 1994 as examples.

“I think the historical record provides some reason for optimism: soft landings, or at least soft landings, have been relatively common in U.S. monetary history,” Powell said.

Stagflationary fears

Larry Summers, former US Treasury Secretary, is skeptical.

IN Author of an article in the Washington Post Last week, Summers accused the Fed of “wishful thinking and misrepresentation” and called what he sees as “absurdity” in the central bank’s forecast for inflation to cool rapidly in a hot labor market.

Summers had previously warned that the Fed’s policies put the US economy on the path of a major recession and stagflation, a toxic mixture of weak growth and high inflation that darkened the US economy in the late 1970s and early 1980s.

For his part, Zandi said stagflation is a “low probability” event because the Fed will do everything possible to avoid it, including stopping the recovery.

“If things look like stagflation,” Zandi said, “the Fed will push us into a recession.”

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