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Risk of recession increases as Ukraine war rages, interest rates rise

The Federal Reserve has raised interest rates to try to squelch soaring inflation, which has impacted gas prices.STEFANI REYNOLDS/AFP via Getty Images

WASHINGTON — A major land war is raging in Europe for the first time in decades. The worst pandemic in a century seems to reignite each time life begins to return to normal. And now — partly driven by those events — fears are rising in the United States about the return of another unwelcome throwback: a recession.

The warnings come from economists, former government officials, and financial titans. They say the risk of a recession striking anytime between late this year and 2024 is growing as the Federal Reserve raises interest rates to try to squelch soaring inflation that has been exacerbated by Russia’s invasion of Ukraine and continued supply-chain problems from COVID-19.


Germany’s Deutsche Bank this month predicted that a recession would hit the United States at the end of 2023. Economists surveyed by the Wall Street Journal ranked the chances of a recession in the next 12 months at 28 percent, up from 18 percent in January. Investment bank Goldman Sachs said this week that the odds of a recession in the next two years were 35 percent. Former Treasury secretary Larry Summers is more pessimistic, putting the chance at about two-thirds.

“I think recession risks now are elevated,” said Karen Dynan, a Harvard professor and former Treasury Department chief economist during the Obama administration. “The period of highest risk would be the end of this year going into the middle of next year — 30 to 40 percent is probably where I would put it.”

Accurately predicting a recession — defined as at least six months in which the economy contracts instead of expands — is no easy feat. And few forecasters at this point are outright saying they believe one is coming, even though there is a broad consensus that US economic growth will slow significantly this year. Fed Chairman Jerome Powell has expressed confidence he and his colleagues can tame inflation without constraining spending by consumers and businesses so much that the economy shrinks.


“In my view, the probability of a recession within the next year is not particularly elevated,” Powell said in March after the Fed increased its benchmark interest rate for the first time since 2018 in the first of an expected series of hikes. The US economy could withstand the higher rates, Powell agued, because of the continued strength of consumer spending and job growth despite annual inflation running at its highest level in four decades.

But history shows it’s rare for the Fed to raise interest rates to rein in inflation without triggering a recession — what economists call executing a “soft landing.” Of the nine attempts by the Fed to do it since the 1960s, a recession has occurred eight times, according to a report last month by investment bank Piper Sandler.

“The Fed doesn’t have a good record of bringing inflation down without causing a recession,” said Bob Schwartz, senior economist at Oxford Economics, a global forecasting and analysis firm.

Still, Schwartz said the more likely scenario is a sharp slowdown in economic growth. Oxford forecasts the US economy’s growth rate to drop from 5.7 percent last year to 3.1 percent this year and to 2 percent in 2024 — well above recession territory.

That’s roughly in line with a report released Tuesday by the International Monetary Fund. It projected the US economy would grow 3.7 percent this year and 2.3 percent in 2023, down from a January forecast of 4 percent and 2.6 percent, respectively. The IMF downgraded its growth projections for the United States and other nations due to the war in Ukraine, which is also fueling price hikes.


“Global economic prospects have been severely set back, largely because of Russia’s invasion of Ukraine,” IMF chief economist Pierre-Olivier Gourinchas said in a blog post Tuesday.

Biden administration officials said they remain vigilant to economic threats and have taken steps to ease inflation, such as releasing oil from the Strategic Petroleum Reserve.

“We are always trying to look out over the horizon and understand the economic risks to the economy and it is certainly the case that we are operating right now and living through a period of elevated risk,” Brian Deese, director of the White House National Economic Council, told reporters in Washington this month. “The war in Ukraine . . . is a profound global supply shock, the implications of which we are working through and living through in real time.”

In normal times, the risk of a recession in any given year is 12 to 15 percent because of the potential for unforeseen shocks to the economy and government policy missteps, Dynan said. And even if the United States falls into a recession in the next year or two, she predicted, it would more likely be a short, mild one, such as those in the early 1990s and 2000s, than a severe downturn like the Great Recession that struck in 2007 and exposed major structural problems in the economy.


“The economy was certainly very strong going into the pandemic, and even though we saw massive job loss during the pandemic, the fundamentals in the economy are still pretty strong,” Dynan said. There aren’t major signs of weakness in the finances of American households and businesses, in part because of the aggressive government response to the pandemic.

But sometimes recessions can be caused simply by bad circumstances, said Stephanie Aaronson, director of the economic studies program at the Brookings Institution think tank. She pointed to the 1990-91 recession, which was triggered by an oil price shock after Iraq invaded Kuwait and precipitated the Persian Gulf War.

The Ukraine war is similar and “from a monetary policy perspective that did not make their job easier,” Aaronson said of Fed officials. She put the risk of recession at 50 percent starting at the end of this year through 2023.

To avoid a recession, Aarronson said, the US economy will need some good luck: the easing of energy prices and constraints on global supply chains. Treasury Secretary Janet Yellen, herself a former Fed chair, acknowledged at a public event in Washington last week that the central bank has a “tricky” effort that “will require skill and also good luck.”

But another former Fed official doesn’t think even good luck can save the US economy from a recession because the central bank waited too long to begin raising interest rates to tackle inflation. William Dudley, who was president of the Federal Reserve Bank of New York from 2009 to 2018, said the only question is when, not if, a recession will happen, based on how aggressively the Fed increases interest rates.


“A hard landing is inevitable,” he told Bloomberg TV this month. “Whether it happens in ‘23 or ‘24, that depends on the Fed.”

But predicting recessions is difficult, and Jamie Dimon, chief executive of JP Morgan Chase, the nation’s largest bank, wouldn’t go there this month. Asked on the company’s quarterly earnings call if there would be a recession this year, he pointed to “storm clouds on the horizon,” including higher interest rates and the Ukraine war.

“I hope those things all disappear and go away, we have a soft landing, and the war is resolved,” Dimon said. “I just wouldn’t bet on all of that.”

Jim Puzzanghera can be reached at jim.puzzanghera@globe.com. Follow him on Twitter: @JimPuzzanghera.