These latest challenges constitute a formidable new test. While government officials and analysts are optimistic the economy will survive the parade of horribles, there really isn’t a backup plan if it doesn’t. The federal government is so exhausted after spending nearly $6 trillion on COVID relief that there is little hope for further stimulus from Washington.
“I would say other than World War II, this is the greatest uncertainty we have faced,” said William Spriggs, professor of economics at Howard University and chief economist for the AFL labor federation. -IOC. He noted that Russian President Vladimir Putin, who spearheaded the invasion of Ukraine, is as unpredictable as the rapidly mutating coronavirus.
Kristalina Georgieva, managing director of the International Monetary Fund, which lends money to struggling economies as part of its work to foster sustainable growth, recently observed that we live in “a more shock-prone world” that is grappling with a devastating world – two punches.
“So we’ve been through a crisis like no other with the pandemic, and now we’re in even more shocking territory,” she told reporters in Washington this month. “The unthinkable has happened: we have a war in Europe.”
The IMF is likely to cut its forecast for global economic growth due to Russia’s war in Ukraine, she said. This is already the case for the American economy. Private analysts have lowered their economic growth estimates for this year, with the investment bank Goldman Sachs recently lowered it to 1.75%. The US economy grew 5.7% in 2021.
Federal Reserve officials are more optimistic, although on Wednesday they further cut their forecast for U.S. economic growth in 2022 significantly to 2.8%, down from the 4% estimate made in December. They also said the war, which has pushed up oil prices, will prevent inflation in the United States from falling as much as it has. was hoping it would be this year.
“The financial and economic implications for the global economy and the U.S. economy are highly uncertain,” Fed Chairman Jerome Powell said. In addition to higher prices for oil and other raw materials produced by Russia and Ukraine, the war could restrict economic activity around the world, further disrupt supply chains and continue to cause volatility on financial markets that would lead to a credit crunch, he said.
Despite these concerns, the Fed moved ahead on Wednesday with an important first step in its fight against inflation. Central bank officials have decreed the first small hike in their benchmark interest rate since 2018 and plan a series of further hikes to take the rate to around 2.8% by the end of next year. . The Fed had kept it near zero since the pandemic hit two years ago to encourage consumer and business spending.
But as the economy reopened from the lockdowns, that spending — fueled in part by federal stimulus — has combined with struggling supply chains still recovering from the pandemic to drive up inflation in arrow. Fears of Russian oil supply disruptions after Ukraine invasion added to upward pressure on prices. The consumer price index jumped 7.9% in February, compared to a year earlier, the highest rate since 1982.
Interest rate increases will ripple through the economy and cause hardship for consumers, although they should reduce inflation. Americans can expect higher interest rates on mortgages, which have already started to take effect, as well as on credit cards and auto loans. But Powell was optimistic that the US economy, supported by a strong labor market, can withstand this without tipping into recession.
“President Powell is paid to be optimistic, and faced with seven rate hikes this year and a handful next year, he’s of course going to say the economy is strong enough to handle them,” said Jack Ablin, Investment Director at Cresset Capital, an investment advisory firm. That optimism boosted investors in the stock market, where major indexes gained last week after falling earlier this year, largely due to the Ukraine crisis.
But Ablin doesn’t share Powell’s optimism and thinks equity investors are “taking a giant leap forward in faith that he’s right.”
Spriggs is also worried. The Fed is limited in how much this can influence inflation which is largely the result of pandemic supply chain issues, further fueled by the oil shock from the war in Ukraine, he said.
“If during World War II I told you the price of oil was going up, it’s horrible, you’d be like, ‘Yeah, because there’s a war and people are cutting off oil production,'” he said. said Spriggs.
Raising interest rates will not solve this problem. However, they will force companies such as car manufacturers who need to borrow money to find other sources of supply, he said. Fed rate hikes are likely to further dampen the U.S. economy as it faces new shocks from the war that will soon go beyond oil. Ukraine is known as the breadbasket of Europe and its production of wheat, corn and seed oil will also be disrupted.
“The Fed is flying in very strong headwinds,” Spriggs said. “We were on the verge of coming out of COVID with a very strong and solid economy and now they risk that we’re going to limp out of it.”
Moreover, the economic effects of COVID are far from over.
Possibly fueled by the highly transmissible BA.2 subvariant of Omicron, COVID cases are increasing in some European countries. And a resurgence of the virus in China has led to lockdowns there that will only further disrupt global supply chains by shuttering factories.
“China is a real risk right now,” said Douglas Holtz-Eakin, president of the American Action Forum, a conservative-leaning Washington think tank.
He agrees with the Fed’s plan to hike interest rates to curb inflation and address American fears that price hikes are here to stay, which would likely only make things worse. The Biden administration should focus on ending the war in Ukraine and preparing for another spike in COVID cases, he said.
“If you don’t take care of those things, we don’t have good choices,” Holtz-Eakin said.
The combined effects of high inflation and rising interest rates will make this a tough year for consumers, economists said. The Biden administration has worked to ease congestion at U.S. ports that has contributed to supply issues, and is investigating whether companies are artificially inflating prices in concentrated industries like meatpacking.
Lawmakers are also offering ideas to try to alleviate some of the economic hardship, including taxing oil company high profits to penalize price gouging and temporarily suspending the federal gasoline tax to lower prices at the pump. a move that some states are also pursuing. But with narrow majorities in an election year, Democrats are unlikely to be able to enact anything significant to deal with the economy. Congress hasn’t even been able to pass a relatively modest $15.6 billion package of additional pandemic aid.
So the economists warn Americans to prepare for another tumultuous year, filled with unknowns. Even Powell admitted he wasn’t sure what to expect.
“We will need to be nimble to respond to incoming data and changing perspectives,” he said Wednesday. of the Fed’s monetary policy. “And we will strive to avoid adding uncertainty to what is already an extraordinarily difficult and uncertain time.”