The current state of the US economy does not resemble the challenging conditions faced by the Federal Reserve in the 1970s and 1980s. Despite a rise to 4.2% over the year, the nation’s unemployment rate remains two percentage points lower than the 50-year average. Inflation has notably decreased in the past two years, hovering slightly above the Fed’s 2% target. Achieving precise inflation levels has proven to be a difficult task. Last quarter, the economy grew at an annualized rate of 2.8%, slightly weaker than the previous quarter. This growth is particularly impressive given the Fed’s decision to raise interest rates to their highest level in over two decades to combat inflation, which had reached a 40-year peak two years ago. The Fed has since begun to lower rates and is anticipated to continue doing so at its upcoming meeting. However, the effects of these rate adjustments may take years to permeate throughout the economy.
Some experts suggest that the tariffs proposed by Trump may not inherently lead to inflation. Michael Feroli, chief US economist at JPMorgan, explained to CNN that while these tariffs could increase prices for many consumer goods, the impact might resemble a one-time surge similar to a sales tax hike. Nonetheless, a sustained increase in tariffs could prompt subsequent price hikes if consumers anticipate inflation and demand higher wages, leading businesses to raise prices further. Should new tariffs be hastily imposed without allowing businesses sufficient time to adjust their supply chains, it could hinder economic growth and deter new investments due to increased uncertainty.
The risk of stagflation, a combination of stagnation and inflation, is perceived to be higher at present compared to previous months, according to Feroli. However, he and his team of economists are not predicting this scenario as their base case. Their forecast does not anticipate a significant spike in inflation levels, partially due to the expectation that the Trump administration will provide businesses with ample time to adapt to any tariff changes. Economists at Wells Fargo share a similar viewpoint, suggesting that immediate tariff increases following Inauguration Day could introduce a modest stagflationary shock to the US economy. While boosting short-term inflation forecasts, it could also dampen the outlook for economic growth. The imposition of such tariffs could potentially increase the likelihood of a stagflation scenario, as noted in a post-Election Day report by the Wells Fargo economists.
Nevertheless, both experts emphasize the uncertainty surrounding potential future policies and their implications. While acknowledging the potential impact of tariffs on inflation and economic growth, they caution that the evolving landscape of policies could significantly alter these projections.
