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Tariffs

Trump's Tariffs and the Fed's Dilemma: A Recipe for Stagflation?

Strategic Insights

— 2 min read

The US economy has been navigating a treacherous landscape, with President Trump's tariffs and the Federal Reserve's monetary policy becoming increasingly entangled. Despite the Fed's optimistic stance, led by Jerome Powell, the economy's prospects have taken a turn for the worse. Powell's refusal to cut interest rates has sparked a heated debate, with Trump calling for a 2.5 percentage point cut to counter the effects of tariffs.

Key Takeaways:

  • The Federal Reserve's median forecast of core inflation has increased from 2.8% to 3.1%, while the forecast of GDP growth has been lowered from 1.7% to 1.4%.
  • The unemployment rate, now at 4.2%, is forecast to rise to 4.5%.
  • Researchers at the Federal Reserve Bank of Kansas City estimate that it took 12-18 months for pandemic-induced price increases to flow fully through to consumers.
  • A survey by the New York Fed found that three of every four businesses are passing on higher tariffs by raising prices.
  • Barclays' chief US economist Marac Giannoni estimates that businesses and suppliers will absorb about half the tariffs by reducing margins and pass the other half on to consumers by raising prices.
  • Trump's Big Beautiful Bill, although still a work-in-progress, will increase deficits and drive up the national debt by $3.4 trillion to $4 trillion over the next nine years, according to the non-partisan Congressional Budget Office and the Tax Foundation.
  • The bond vigilantes, fearing inflation and a government that has not balanced its budget since 2001, have been demanding higher interest rates since Moody's downgraded US debt on May 16.

Statistics:

  • Core inflation forecast: 3.1%
  • GDP growth forecast: 1.4%
  • Unemployment rate: 4.2% (forecast to rise to 4.5%)
  • Timeframe for pandemic-induced price increases to flow fully through to consumers: 12-18 months
  • Percentage of businesses passing on higher tariffs by raising prices: 75%
  • Estimate of tariffs absorbed by businesses and suppliers: 50%
  • National debt increase over the next nine years: $3.4 trillion to $4 trillion
  • Date of Moody's downgrade of US debt: May 16

Sources:

  • "The Federal Reserve Board chairman" speech by Jerome Powell (no date mentioned in the original text)
  • "We expect a meaningful amount of inflation to arrive in coming months" - Jerome Powell (no date mentioned)
  • Study by researchers at the Federal Reserve Bank of Kansas City (no date mentioned)
  • Survey by the New York Fed (no date mentioned)
  • Interview with Barclays' chief US economist Marac Giannoni (no date mentioned)
  • Congressional Budget Office report (no date mentioned)
  • Tax Foundation report (no date mentioned)
  • Moody's downgrade of US debt (May 16)

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