How the war in Ukraine could hurt the US economy

WASHINGTON — Russia’s war on Ukraine could drive up U.S. gasoline prices, raising headline inflation as well as the chance of a slowdown leading to layoffs.

“The risks of recession later this year and into the next are now uncomfortably high,” Mark Zandi, chief economist at Moody’s Analytics, said in an email.

The Federal Reserve will try to stem inflation by raising interest rates this year, which will make it more expensive to borrow money, which means less for people to spend on goods and services. Soaring gas prices could push the Fed into more aggressive monetary “tightening” than it has already anticipated.

“The chances of the Fed misstepping and tightening too aggressively are significant and growing,” Zandi said. “Landing the economy jet on the tarmac was already going to be difficult for the Fed due to the pandemic and high inflation, but the invasion of Russia makes it more likely that the economy jet will hit the tarmac hard or even crashes.”

For a week, President Joe Biden has been warning Americans that a war would affect their wallets. Biden said Thursday that oil and gas companies should not “exploit this moment to raise their prices” and that the administration would consider tapping the strategic petroleum reserve.

“I will do everything in my power to limit the pain the American people are feeling at the gas pump,” Biden said.

At $3.54 per gallon, gasoline prices are at their highest level since 2014. Democrats in Congress had previously suggested suspending the 18-cent-per-gallon federal gasoline tax, though many lawmakers and political experts have brushed off the idea.

Gas prices have risen slightly this week but will eventually catch up with the surge in oil prices following the war, economists and industry watchers say.

“Prices at the pump will likely continue to rise as crude prices continue to climb,” the American Automobile Association said. said in a press release Thusday. “As the conflict escalates with more sanctions and retaliatory actions, oil markets will likely respond by continuing to raise the price of crude oil to reflect more risks of disruption to global oil supplies.”

The economic sanctions announced this week by the White House target Russia’s financial sector and do not block fuel exports, in part in an effort to avoid hurting European or American consumers too much. Republicans have renewed their calls for Biden to ease restrictions on domestic energy production, though such a move is unlikely to have an immediate effect on gas prices.

Oil price spikes preceded the recessions of 1973, 1981 and 2007. “Oil market disruptions and recessions went hand in hand throughout the post-war period,” Congressional Research Service observed in 2010.

Of course, the biggest concern about the war on Ukraine is that innocent people are being killed as a dictator attempts to overthrow a democracy. And Europe faces a worse economic threat than the United States, not to mention a potentially unstable political future.

But the immediate economic impact on the United States could be significant, with major political implications, as control of Congress is up for grabs in this year’s midterm elections.

Even before the war, many economists and financial analysts feared that the Federal Reserve would have the difficult task of reducing inflation without slowing the economy to such an extent that millions of people would lose their jobs.

As American Enterprise Institute economist Michael Strain written thursday“A spike in energy prices could necessitate even more aggressive tightening than would otherwise have been the case, increasing the risk that the central bank will accidentally tip the economy into recession.”


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Sara Adm

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