Protecting the U.S. economy from a pernicious variety of inflation known as stagflation. This all-too-real doomsday scenario includes soaring unemployment and double-digit inflation. In fact, just last week, Federal Reserve Chair Jerome Powell underscored the looming economic impact that will likely result from President Donald Trump’s bellicose tariff attacks. Today, the Fed confronts a new, untested economic crisis. On the one hand, it is doing everything in its power to carry out its dual mandate of delivering full employment and stable inflation.
These goals are the core of the Federal Reserve’s mission – to bring forth low unemployment and stable inflation rates. The tariffs that President Trump just announced are threatening all of these goals. The magnitude and breadth of these tariff hikes have left even the most seasoned trade economists stunned. Now they’re asking how these changes will play out for the economy overall.
Yet, in spite of all these difficulties, new data indicates that the U.S. economy is continuing to hold up pretty well at least for now. In an effort to spare the most damaging economic fallout, the administration has offered temporary exemptions on certain electronic products—an attempt at growing shelter. Trump did announce that further tariffs are coming on important sectors, such as semiconductors, pharmaceuticals, copper, and timber.
With inflation starting to remain persistently above the Fed’s 2% target, pressure on the Fed to act is mounting. Several Fed officials have emphasized the importance of monitoring public perceptions regarding prices. The University of Michigan’s widely followed consumer survey might be indicating that consumer confidence in price stability is eroding quickly. This drop in support is a key indicator of rising concerns among Americans.
Previously, Chicago Fed President Austan Goolsbee had detailed the added confusion tariffs make to what is already a difficult monetary-policy environment. As he illustrated, “A tariff is essentially a negative supply shock. That leads to a stagflationary shock, that is, deteriorates both sides of the Fed’s dual mandate at once. His remarks highlight the lack of clarity about how the central bank needs to respond in a chaotic environment.
Cleveland Fed President Beth Hammack is among those who see some merit to Goolsbee’s concerns. She said, “This is a precarious combination of risks for monetary policy to manage.” She proposed that right now, we don’t really know where the economy is headed. Only waiting long enough to see additional data will truly shed light on what exactly lies ahead.
So it seems the Fed’s strategy is patience for the time being. In part, as they judge the ever-unfolding economic picture, officials have signaled that the rush to lower interest rates is not as urgent. In his testimony, Powell stressed the need for a measured approach. He promised, “We’ll measure how far the economy is from each goal and take into account the varying time horizons needed to close those gaps.”
The double hit of ever-increasing prices and anticipated job losses is dangerous for Americans’ communities and companies just the same. In this regard, Powell rightly acknowledged the storm clouds on our horizon. He wrote, “We know from past experience that prolonged high unemployment or inflation is corrosive and hurtful to communities, to families, to businesses.