OMAHA, Neb. (KMTV) — Russia and Ukraine both play major roles when it comes to our biggest commodities like grain and gas. This disrupted supply chain could lead to what an economics professor calls "stagflation."
"Stagflation is a combination of rising price and economic contraction. And so, COVID-19 put us in a possible route toward stagflation," UNO Associate Professor Zhigang Feng said.
Feng warns it's notoriously difficult to get out of.
"We have high inflation. We have supply chain disruption. We are already in the possible route goes for stagflation. That explains why the Fed is very eager to raise the interest rate," Feng said.
The Russia/Ukraine crisis adds more complications when it comes to how the Fed will determine the interest rates.
"Before Russia/Ukraine crisis kicks in, the Fed is already in a difficult position to raise interest rates too fast or too low. If they don't raise the interest rate, we are in a bad situation when the next recession comes. If we raise the interest rate too high, we might push the economy into immature recession," Feng said.
Russia and Ukraine account for one-third of world grain exports. Globally, Russia provides 70% of gas and is the third-largest oil producer, putting more strain on the supply chain.
"Fed decides to take the middle ground. They don't want to push the interest rate too high since that's going to exacerbate potential damage from Ukraine/Russia crisis to our economy. But they want a proactive state to show market. To give them some wiggle room if we are really in a recession," Feng said.
"The Federal Reserve increased the prime rate by 0.25, the market was expecting a 0.5 increase in prime rate. The market was very negative to 0.25 increase and mortgage bonds are suffering from the Fed not doing enough. The market wanted the Fed to do more to slow inflation and they didn't feel the Fed did enough today," Loan Officer Terry Williams said.
He expects the housing market will continue to appreciate since there's a huge deficit in housing inventory.
"Between 1950 and 2009, every ten years, they built 20 million houses. Between 2009 and 2019 they had 6 million houses. So we have a huge deficit in new construction," Williams said.
Both advise adapting to new circumstances.
"With restrictions easing, the economy seems to be on fire right now. Inflation isn't changing in the near term. Get in the market and own a house today. That same house could cost 10 to 15% more one or two years from now," Williams said.
"This is not only good for us to come back with inflation. Move our economy and world to a better and more renewable world," Feng said.
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