Mark Zandi says recession risks are ‘uncomfortably high and moving up’

Before Russia invaded Ukraine, economists had hoped that energy prices and general inflation would subside in the spring and summer. Now, inflation expectations are getting bleak as prices rise gasolineAnd the foodMetals and other raw materials rose sharply.

‘A line that cannot be crossed’

The worsening inflation picture may prompt the Federal Reserve to do more to bring inflation down to healthy levels.

Consumer prices rose 7.9% in February, the largest 12-month rise in 40 years. But this inflation report did not explain the impact of the Russian invasion of Ukraine.

Zandi said it’s clear that the war in Ukraine is boosting inflation expectations, an ominous development for Federal Reserve officials who had been hoping to allay inflation fears. Central bankers get nervous when families and business leaders anticipate higher prices, because that could become a self-fulfilling prophecy.

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

The Federal Reserve hasn’t done this since 1994

Morgan Stanley, who joined a number of other Wall Street banks, said Thursday that he expects the Fed to raise interest rates by half a percentage point over each of the next two months. The Fed has not done so in consecutive meetings since 1994.

“The more the Fed steps on the brakes, the more likely the car will stall and the economy will enter a recession,” Zandi said.

Zandi said the odds remain in favor of the Fed to make the economy slow into a self-sustaining expansion. “We just need a little luck here. The pandemic and Ukraine cannot go down a dark path,” he added.

“I think the historical record provides some basis for optimism: Soft, or at least easy, landings have been relatively common in American monetary history,” Powell said.

stagflation fears

Larry Summers, the former US Treasury secretary, is skeptical.

Summers previously warned that Fed policy left the US economy on a path of Great Recession and stagflation, the toxic combination of weak growth and high inflation that distorted the US economy in the late 1970s and early 1980s.

“If it looks like we’re headed into stagflation, the Fed is going to push us into a recession,” Zandi said.