Just a few days after President Trump won the 2024 elections, Jerome H. Powell, chairman of the Federal Reserve, bypassed a question about how the central bank would struggle with a poisonous combination of high inflation, stagnating growth and rising unemployment.
“The whole plan is not to have internshipflation,” Mr Powell told reporters. “Beat on wood, we got so far without seeing a real weakening on the labor market.”
Two months later, the aggressive tariff statements of Mr Trump, Slash-and-Burn cut cuts for the federal government and the resulting frenzy in financial markets De Fed brought the Fed to an incredibly uncomfortable place.
Right -edged stagflation remains an external prospect: the basis of the US economy is still solid and it will be a pretty big shock for crumbling. But what once seemed to be a historic soft landing – with the Fed struggling with rapid inflation control while the economy remains intact – looks increasingly vulnerable.
When the FED plays its policy meeting on Wednesday, it is generally expected to keep the interest rates stable from 4.25 to 4.5 percent. Mr Powell recently traced the need for threatening changes to the loan costs, and said that the central bank was aimed at “separating the signal from the noise” when it came to the policy of the Trump government. With the economy in a good place, he said, the Fed is “well positioned to wait for greater clarity.”
But if the economy begins to crack and inflationary pressure is growing – a situation where consumers are increasingly afraid – the policy decisions of the Fed will take a completely new degree of difficulty. The central bank threatens more square in the crotch hair of Mr. To place Trump.
“The Fed certainly has a dilemma,” said Mahmood Pradhan, head of Global Macro at the Amundi Investment Institute, an asset manager. “The FED has no control over this background, no control over policy uncertainty and no control over the volatility of this discussion about rates. It is a very heavy hand that they have been treated. “
Central Bank officials have become agile when avoiding questions about Mr Trump and his policy. But the flurry of actions taken by the Trump government in just the first two months of his second term has made so much more difficult to do.
The enormous part of the tariff threats alone has exploded the reach of possible results for the economy. That even rattled the most optimistic of economists about the prospects. They also had to contend with the steep spending reductions that were undertaken by Elon Musk and his Ministry of Government Efficiency and the prospects that millions of immigrants could be deported.
Mr Trump's restraint to excluding a recession and a recent shift in tone of his top advisers about the amount of pain that may be needed to achieve a promised economic tree has strengthened the fears about how far the administration goes to push his agenda. Those fears were exacerbated last week when Mr. Trump struck warning signals, nerve -racking financial markets.
There are indications that the uncertainty surrounding rates is already starting to bite. Consumer sentiment fell for a third consecutive month in March, according to a preliminary investigation conducted by the University of Michigan and released on Friday.
According to FactSet, the tariff interview is engaged on company care, where chief executives warn more and more about sucking demand and rising prices. Optimism about the labor market is also blurred, with a growing share of consumers investigated by the Federal Reserve Bank of New York, which now expects a higher unemployment and a worse financial situation in the coming year.
“Consumption, which has been the most important engine of the US economy in recent years, will no longer offer so much impulse,” said Marc Giannoni, a head -American economist at Barclays, who previously worked at the regional banks of the Fed in Dallas and New York.
Last week, Mr Giannoni's team lowered his growth rousing spelling for the US economy by almost a full percentage point, to 0.7 percent on the basis of fourth quarter-celebrated quarter. Economists at JPMorgan and Goldman Sachs have also moved their estimates in a similar direction, with reference to rates and the expectation that increased uncertainty of the trade policy will deteriorate investments and recruitment.
A disturbing sign is that they did that, while also increasing their predictions for inflation. Companies cancel for higher prices of Mr Trump's rates, which will increase the costs for imported goods. Many have warned that they will probably pass on those increases to consumers.
Tom Madrecki from the Consumer Brands Association said that the major food companies that represents his trade group, such as Pepsico, General Mills and Conagra brands, can be hurt as the products that they are not easy in the interior, are affected with rates.
“There is no winning in this situation,” he said. “There is no way not to rise the supermarket prices, and yet consumers have reached the breaking point at the same time.”
The group recently wrote to Mr Trump and asked for tariff exemptions about products such as coffee, cocoa and oats, which mainly come abroad.
Mr. Madrecki said that an exemption would enable companies to prevent them from having to eat costs, which will not do anything in terms of increasing jobs or continuing to invest in new facilities. “
Americans are already expecting higher prices. The expectations of inflation have risen greatly for the coming year as for a longer horizon of five years. Some economists play down how much of a signal must be taken from those measures, partly due to the increasingly part -time nature of some reactions. Market -based measures have also remained steadily, even if research -based has been shifted.
But the greater reach of reactions about where inflation is going is a reason for concern for others.
“There is enormous disagreement about what inflation can be, and what this means in practice is that inflation expectations are not anchored,” says Yuriy Gorodnichenko, an economist at the University of California, Berkeley. “It is very easy to change the beliefs of people from a song to the other, because everyone is so insecure and confused.”
How inflation expectations evolve will be crucial for how the FED outlines its policy path. The central bank has traditionally argued that he can prevent it from responding to inflation -induced inflation because that price pressure is often temporary. The FED responded to growth problems that arose during the last global trade war in Mr Trump's first government by reducing interest rates in 2019.
But the central bank runs the risk of being more inconvenient in its response to a weakening economy because inflation is still above its target of 2 percent. Mr Powell said this month that the approach of the Fed to navigate rates would ultimately depend on “what happens with inflation expectations in the longer term and how persistent the inflatory effects are”, suggesting that the focus of the central bank remains predominantly on price pressure.
Jon Faust, who was a senior adviser of Mr Powell as recently as last year, said: “The only thing that is unacceptable is inflation rising and the inflation expectations that rise with it, because that is considered in the right way as the worst of all the results that you cannot ultimately let happen.”
An extra complication is Mr. Trump's preference to test the political independence of the Fed. Although the president has so far apart from comments as often as he did during his first term about Mr Powell and the FED policy decisions, he has tried to involve the institution more seriously through executive orders.
“President Trump seems to be less limited by conventions than the last time,” said Mr Faust, who is now in the Center for Financial Economics at Johns Hopkins University. “It seems that the economic situation can easily be loaded more in terms of a delaying economy and possibly tariff -controlled increase in inflation. That is a recipe that will most likely lead to a serious confrontation between the FED and the administration. “
