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.
“It’s reasonable to be nervous here,” Zandi said. “The Russian invasion and the surge in oil and commodity prices really made a difference.”
“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.
“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.
Larry Summers, former US Treasury Secretary, is skeptical.
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.
“If things look like stagflation,” Zandi said, “the Fed will push us into a recession.”