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How the War in Ukraine Could Hurt the US Economy

Russia’s war on Ukraine could push up gasoline prices in the US, raising overall inflation as well as increasing the chances of a layoff-induced recession.

“The risks of a recession at the end of 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 contain inflation this year by raising interest rates, which will make it more expensive to borrow money, meaning it will cost less for people to spend on goods and services. Skyrocketing gas prices could prompt the Fed to go for a more aggressive monetary “tightening” than already planned.

“The Fed took the wrong steps and tightened too aggressively, they materialize and grow,” Zandi said. “It was already going to be difficult for the Fed to land economic aircraft on the tarmac due to the pandemic and high inflation, but an invasion of Russia makes it more likely that economic aircraft hit the tarmac hard or crash.”

For the past week, President Joe Biden has been warning Americans that the war will hit their pocketbooks. Biden said on Thursday that oil and gas companies “should not take advantage of this moment to hike their prices” and that the administration would consider exploiting strategic petroleum reserves.

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

At $3.54 per gallon, gas prices are at their highest level since 2014. Democrats in Congress had already suggested suspending the federal 18-per-gallon gas tax, although many lawmakers and policy experts have broke the idea,

Gas prices rose marginally this week, according to economists and industry watchers, but oil prices will eventually rise as a result of the war.

“Pump prices likely to continue rising as crude oil prices continue to climb,” American Automobile Association said in a release Thursday. “As the conflict escalates with more sanctions and retaliatory actions, oil markets will likely react to continued crude price increases to reflect greater risks of disruption to tight global oil supplies.”

The economic sanctions announced this week by the White House target Russia’s financial sector and do not block fuel exports, partly in an effort to Avoid excessively hurting European or American consumers, Republicans renewed their calls for Biden to ease restrictions on domestic energy production, although such a move would be unlikely to have an immediate impact on gas prices.

The rise in oil prices was preceded by recessions in 1973, 1981 and 2007. “The disruption and slowdown in the oil markets have gone hand in hand during the post-war period,” Congressional Research Service celebrated in 2010,

Of course, the biggest concern about the war against Ukraine is the killing of innocent people as a dictator tries to overthrow democracy. And Europe faces a worse economic threat than America, not to mention a potentially volatile political future.

But the immediate economic impact on America could be significant, which has major political implications as Congress looks to seize control in this year’s midterm elections.

Even before the war, many economists and financial analysts worried that the Federal Reserve would face the difficult task of reducing inflation without slowing the economy so much that millions of people would lose their jobs.

As Michael Strain, economist at the American Enterprise Institute wrote on thursday“Energy price increases may require even more aggressive tightening than would have been the case otherwise, increasing the risk of the central bank pushing the economy into recession.”

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