US faces risk of long stagflation struggle: Moody’s

Abstract

Dive Brief: The U.S. faces a risk of long-term stagflation, or near-zero economic growth along with persistently high inflation - an outcome especially harmful to companies that are vulnerable to rising raw materials prices or a slump in "Discretionary demand," according to Moody's Investors Service. A stagflationary economy would feature an unmooring of inflation expectations, "a much more aggressive" withdrawal of monetary stimulus and persistently weak economic growth, Moody's said. "Though the U.S. economic data have been decent, the economy is still at risk," according to Moody's Analytics. The economy "Is vulnerable to anything going wrong, including further tightening in financial market conditions or an unexpected hike in energy prices." Pessimism about the economy is far from universal. "The Fed is clear it will not countenance stagflation and will aggressively tighten monetary policy to force the economy into recession to wring out the high inflation and inflation expectations," Moody's Chief Economist Mark Zandi said in a report. The central bank Wednesday intensified its fight against the highest inflation in nearly four decades, raising the benchmark interest rate by 75 basis points for the third straight meeting and pushing up estimates for further increases in borrowing costs through next year. "Whether the economy suffers a downturn or skirts one depends on if inflation continues to steadily moderate back to the Fed's target," Zandi said.