“Stagflation” is the Bogyman, which hangs over the Federal Reserve Meeting this week: “This is the tangled web in which you are in” “



When the Federal Reserve officials finally metAt the end of JanuaryThings looked pretty good: attitudeWas solid. The economy had just grownA solid paceLast year of last year. And inflation whilepersistent,had fallen strongly from his climax more than two years ago.

What a difference does seven weeks.

While the Fed is preparing to meet on Tuesday and Wednesday, the central bank and its chairman Jerome Powell may be led to a much harder place. inflationimproved last monthBut is still high andTariffit could press higher. At the same time running tariff threats and sharp cuts in government expenditureand jobsdancesconsumerAnd business trust that could weigh up the economy and even increase unemployment.

The toxic combination of even high inflation and a weak or stagnant economy is often “referred to”stagflation“A term that central bankers follow. It is what the United States in the 1970s, when even deep recessions did not kill in inflation.

Stagflation is difficult for the Fed because the political decision -makers advise – or keep them up – to combat inflation. However, if unemployment increases, the FED would usually lower interest rates to reduce the credit costs and increase growth.

It is not yet clear that the economy will decrease in stagflation. At the moment, such as companies and consumers, the Fed is setting ahuge amount of uncertaintyTo the economic prospects. But even a mild version – with unemployment from its current low level of 4.1%, while inflation was above the 2% goal of the Fed – would be a challenge for the central bank.

“This is the tangled web in which there is located,” said Esther George, former president of the Kansas City Branch of the Federal Reserve. “On the one hand, they have an inflation stickiness. At the same time, they try to check what effects this could have on the labor market if growth withdraws. So it is a difficult scenario for you.”

Fed officials will almost certainly keep their key figures unchanged this week. As soon as the meeting is completed on Wednesday, you will publish your latest quarterly business projections that will probably prove that you will reduce your rate twice this year – just as you were projected in December.

The FED implemented three cuts last year and then signaledAt the January meetingthat they were mostly a break until the economic prospects become clearer.

The Wall Street investors await three interest rate cuts this year, June, September and DecemberCme fedwatchIn part because they are worried, an economic slowdown will force more reductions.

A development that now fed civil servants nowConsumer mood survey. It showed the greatest increase in long -term inflation expectations since 1993.

Such expectations basically measure whether the Americans are worried, inflation becomes worse-sind because they can fulfill themselves. If companies and consumers expect higher costs, you can take steps that increase inflation, e.g. B. to demand higher wages, which in turn can force companies to increase prices to compensate for higher labor costs.

Some economists warn that the Michigan University survey is temporarily and initially only based on around 400 answers. (The final version, which will be published later this month, usually includes around 800th) and financial market measures of the inflation expectations based on the bond prices have actually declined in recent weeks.

The latest inflation values ​​have been mixed. The consumer price indexLast week droppedFor the first time in five months to 2.8% of 3%, an encouraging change. But the preferred price display of the Fed, which will be published later this month, should remain unchanged.

The jump of inflation expectations is also a problem for the Fed, since civil servants, including Powell, are willing to gradually return to their 2% goal in 2027, since expectations were generally low. If other measures show the increase in inflation employment, the Fed could get under more pressure to get into inflation faster.

“I am worried when I see that consumers’ expectations move in the opposite direction,” said George. “I think you just have to keep an eye on it.”

The last time that President Donald Trump bought tariffs in 2018 and 2019, the overall inflation did not significantly increased, partly because they were not nearly as wide as what he is currently proposing, and some tasks, such as those on steel and aluminum, were watered down with gaps. Now that the Americans have experienced a painful inflationary episode, they are likely to be shaking increasing prices.

Powell referred such concerns in comments at the beginning of this month. He said the tariffs could only have a unique impact on prices without causing continuous inflation. But that could change “if it turns into a series” of tariff hikes, he said on March 7th or “If the increases are larger, that would be a role.”

“What is really important is what happens to long -term inflation expectations,” added Powell.

A week after his comments, these expectations were higher in the survey of the University of Michigan.

This story was originally on Fortune.com



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