Escalating apprehensions over stagflation escalate, with the US Federal Reserve underscoring the mounting peril as the trade war takes a toll.
Revised Base Article:
In a stern warning, the US Federal Reserve has flagged the growing concern of stagflation in the nation's economy, as it grapples with the impact of US President Donald Trump's trade war with China.
Fed chair Jerome Powell sounded the alarm, stating that the trade tariffs, if they persist, would slash growth and inflate prices. He explained that the steep tariffs, delayed for a temporary 90 days, would stir up a surge in inflation and hobble economic growth if they're kept in place.
This statement came as America's central bank chose not to adjust interest rates, keeping them at 4.25% to 4.5%.
Powell added: "If the colossal tariff increases get long-lasting, they're likely to incite a climb in inflation, a halt in economic expansion, and an increase in unemployment." He emphasized that the economic climate is "drenched in some somber sentiment," with uncertainty clouding the horizon for businesses and households.
He said that if the concerns persist without any relief, the economic data will likely reflect this dismay.
In a warning sign, Powell revealed that dealing with both rising unemployment and escalating inflation at the same time would present a "complicated and challenging predicament."
Trump has gone after Powell, labeling him a "major loser" for not reducing interest rates. The President has taken to social media, expressing his desire for Powell's termination. However, amidst market turmoil, Trump later declared that he has no plans to fire Powell.
The Fed is compelled to confront the threats posed by Trump's tariffs on its trading partners. One significant risk is that the tariffs drive up prices, fanning inflation, while weakening growth. The unfortunate scenario of stagnating growth and rising inflation is known as stagflation.
Stagflation poses a thorny challenge for central banks, as rate reductions can stimulate the economy, but rate hikes are needed to keep inflation in check. The Fed acknowledged that the economic outlook has become even murkier.
Recent official figures offered a picture that was partly encouraging and partly disheartening. The US saw 177,000 new jobs created last month, outperforming projections, and inflation – according to the Fed's preferred metric – languished at 2.3%.
However, the economy contracted by 0.3% during the first quarter, a figure influenced by a frenetic increase in imports before the tariffs' introduction, consequently leading to a swelling trade deficit that impeded GDP growth.
Powell suggested that if the Fed is compelled to combat both rising unemployment and escalating inflation at once, it would face a daunting juggling act. He maintained that Trump's calls for rate cuts wouldn't impact their objective of making well-informed, unbiased decisions.
Enrichment Data:
Overall:
The US-China trade war poses several potential risks to stagflation and interest rates in the US economy:
Effects on Stagflation
- Price Increases and Inflation: The US-China trade war drives up prices on various imported goods, exacerbating inflationary pressures. Tariffs have led to price rises for everyday commodities like clothing, toys, and electronics, sourced via major retailers such as Target, Walmart, and Amazon[2].
- Economic Slowdown: The trade war and resulting disruptions to the supply chain threaten to slow down US economic growth. Analysts predict that trade barriers could diminish growth by almost 1 percentage point, with the growth rate falling to between 0% and 0.5% by 2025[3]. The risk of a technical recession looms, as continued economic stagnation may take place while inflation remains high, creating a stagflationary scenario[3].
- Supply Chain Cutoffs and Reduced Competitiveness: By disrupting the supply chain and boosting input costs for US companies, the trade war erodes their competitive edge. Meanwhile, other regions such as Europe may capitalize and gain ground by taking advantage of the goods that get diverted away from the US market, worsening US economic growth[3].
Effects on Interest Rates
- Inflation-Driven Rate Pressure: Escalating inflation due to tariffs will likely prompt the Federal Reserve to reconsider raising interest rates to counter inflationary pressures. However, the possibility of economic stagnation might lead the Fed to take a more gradual approach, striking a balance between reining in inflation and sustaining growth[3].
- Capricious Policy Response: The Fed and Treasury's readiness to intervene and stabilize financial markets will influence interest rate decisions. Given the stagflationary conditions, rate choices will become intricate, dependent on evolving economic data and ongoing trade policy developments[3].
Summary: The US-China trade war sets the stage for a stagflationary environment, characterized by simultaneous price increases and inflation, as well as stumbling or slowing economic growth. This bleak mix complicates monetary policy, as rising inflation encourages the consideration of higher interest rates, yet economic stagnation requires rate stability to avert a potential recession[2][3].
Thus, the trade war forms a challenging economic landscape, where price rises inflate inflation while growth falters, contributing to the risks of stagflation and uncertain interest rate policies in the US[2][3].
- The US Federal Reserve, alarmed by the persisting trade tariffs resulting from the US-China trade war, warned about the potential threat of stagflation in the American economy.
- Jerome Powell, the Fed chair, stated that if tariffs continue, they could trigger a surge in inflation and hinder economic growth, while also halting expansion and increasing unemployment.
- The Fed acknowledged that dealing with both rising inflation and stagnating growth, a combination known as stagflation, would present a complex and challenging predicament for central banks.
- The ongoing trade war could lead to an increase in everyday commodity prices, such as clothing, toys, and electronic goods, sourced from major retailers like Target, Walmart, and Amazon.
- The US-China trade war may result in a stagflationary environment, where inflation grows while the economy slows, creating complexities in monetary policy, as the Fed must balance the need to rein in inflation with the requirement for rate stability to avoid a potential recession.
