Renowned economist Stiglitz has expressed concerns that Federal Reserve Chair Jerome Powell may opt to raise interest rates in response to persistent inflation pressures. Stiglitz warned that such a move, coupled with potential retaliatory actions from other nations, could trigger a global economic slowdown, leading to a dire scenario of simultaneous inflation and stagnation or sluggish growth.
BNP Paribas has painted a somber picture for the economic outlook in 2025, anticipating that the Fed will halt its easing cycle in the coming year amidst a significant uptick in inflation from late 2025 through 2026, which is attributed to the implementation of tariffs. The firm foresees the Consumer Price Index (CPI) stabilizing at 2.9% by the conclusion of next year before ascending to 3.9% by the close of 2026.
Minneapolis Fed President Neel Kashkari described the potential consequences of other countries engaging in a “tit-for-tat” trade war as a factor that could sustain elevated inflation levels in the long term.
Investors are beginning to take note of these risks, with the latest Global Fund Manager Survey from Bank of America revealing that expectations of a scenario where the economy continues to expand while inflation pressures persist have reached an eight-month high.
In the United States, while tariffs are typically determined by Congress, the president retains the authority to impose specific tariffs under certain circumstances. President Trump has indicated his intention to exercise this power. The specific policies that will take precedence once Trump assumes office, or the extent to which he will fulfill his existing promises, remain uncertain.
Economists project that tariffs are likely to be implemented in the upcoming year, albeit starting at modest levels and being selectively targeted. A cumulative 20% increase in tariffs on Chinese imports is anticipated, alongside additional specific levies on European goods. However, broader measures like a universal baseline tariff, which Trump has previously threatened, are not expected to materialize according to projections.
Despite the anticipated selective approach to tariffs, economists anticipate that any tariffs enacted by the Trump administration will contribute to rising inflation over time. Consequently, no interest rate cuts from the Federal Reserve are factored into the outlook for the following year. The expectation is that inflation will not dip below 2.5% in the near future, which may prompt the Fed to refrain from further rate reductions. The economy is predicted to display resilience in the face of these challenges.
The US economy demonstrated resilience throughout 2024, surpassing expectations with strong retail sales figures in November, robust GDP performance, a stable unemployment rate around 4%, and moderated inflation rates. Despite uncertainties moving forward, economists remain optimistic about the economy’s ability to weather potential challenges, buoyed by the Fed’s previous rate cuts and the ongoing growth momentum.
In conclusion, the economic landscape is poised for potential shifts in response to inflationary pressures and trade dynamics, with experts emphasizing the importance of monitoring policy decisions and their implications for economic stability and growth.
