Recession risk from high oil prices (with Kailey Leinz, Joe Mathieu)

The US economy is uncomfortably close to recession. If oil prices reach $125/barrel and stay there for 2-3 months, or if gas hits $5/gallon, it would push the fragile economy into recession. Lower-income households are already under severe pressure with real disposable income falling. Neither fiscal nor monetary policy is likely to come to the rescue.

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Mark Zandi 9.0

Recession risk from high oil prices (with Kailey Leinz, Joe Mathieu)

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If we're at $125 and we stay there for two, three months, that would be enough to push the fragile economy into recession.

Kailey Leinz

Mark Zandi issued a warning: the Iran war needs to end and the Strait of Hormuz needs to reopen soon, or recession becomes more likely than not. How soon is soon?
Mark Zandi

How about today. If it goes on much longer than a few days or weeks, we will see much higher oil prices. We're drawing down inventory and the strategic petroleum reserve is fading. If we don't get a resolution, prices will jump again and we'll get to $5/gallon, which would push the economy into recession.
Joe Mathieu

Do we need to hit the $5/gallon mark for recession ingredients to be in place?
Mark Zandi

That's about right. Our simulations show it would take oil at about $125/barrel for 2-3 months to push the economy into recession. $5/gallon might be a bit over, but close enough.
Kailey Leinz

If we get there, what then? Would there be a policy response? What would the Fed do if this is a supply-driven inflation problem?
Mark Zandi

I don't think anyone comes to the rescue. Fiscal policymakers can't get it together quickly enough. The Fed won't rescue either—if inflation expectations are rising, they'll focus on getting inflation down even if it means recession.
Kailey Leinz

Treasury Secretary Bessent said 'we've got the Warsh Fed now.' Do you believe the Warsh Fed will treat this situation differently?
Mark Zandi

No. Warsh might vote for a cut, but I doubt the rest of the committee would follow suit. Fed members are talking about rate increases, not cuts. It doesn't matter who the chair is—if inflation expectations are high and rising, you need to get that under control regardless of what happens to the economy.

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