Washington – When Federal Reserve officials met for the last time in End of JanuaryThings looked pretty good: hiring It was solid. The economy had just grow A solid rhythm in the last quarter of last year. And inflation, while stubborn, He had fallen abruptly from his beak more than two years ago.
What a difference seven weeks ago.
While the Fed prepares to meet on Tuesday and Wednesday, the Central Bank and its president, Jerome Powell, are aimed at a much more difficult place. Inflation Improved last month But it is still high and duty I could push it higher. At the same time, continuous tariff threats, as well as acute cuts for government spending and jobs It has shuddered consumer and business confidence, which could weigh on the economy and even boost unemployment.
The toxic combination of still high inflation and a weak or stagnant economy is often known as “stagflation”, a term that persecutes central bankers. It is what was attributed to the United States in the 1970s, when even deep recessions did not kill inflation.
The stagflation, if it arises, is difficult for the Fed because typically the political leaders would raise the rates, or keep them high, to combat inflation. However, if unemployment also increases, the Fed would generally reduce rates to reduce loan costs and raise growth.
It is not yet clear that the economy will sink into stagflation. For now, like companies and consumers, the Fed is dealing with a a lot of uncertainty surrounding the economic perspective. But even a slight version, with the unemployment that increases from its low level of 4.1%, while inflation remained stuck above 2% of the Fed, would raise a challenge for the Central Bank.
“That is the entangled network in which they are,” said Esther George, former president of the Kansas City branch of the Federal Reserve. “You have inflation stickiness on the one hand. At the same time, you are trying to see what impact this could have on the labor market, if growth begins to go back. Therefore, it is a difficult scenario for them safely.”
Fed officials will surely maintain their key rate without changes in their meeting this week. Once the meeting concludes on Wednesday, they will launch their latest quarterly economic projections, which will probably show that they hope to reduce their rate twice this year, the same as they project in December.
The Fed implemented three cuts last year and then pointed out at the January meeting They were largely in pause until the economic perspective becomes clearer.
Wall Street investors expect three rates reductions this year, in June, September and December, according to the prices of future tracked by CME FedwatchIn part because they care, an economic slowdown will force more reductions.
A development that is likely to disconnect to Fed officials is the strong jump in inflation expectations this month at the University of Michigan. Consumer’s feeling survey. He showed the greatest increase in long -term inflation expectations since 1993.
Such expectations, which basically measure if Americans are worried about inflation, are important because they can become self -fulfilled. If companies and consumers expect higher costs, they can take measures that increase inflation, such as demanding 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 preliminary and is now based on only 400 answers. (The final version that will be launched at the end of this month generally includes around 800.) and the financial market measures of inflation expectations, based on bond prices, have actually decreased in recent weeks.
The most recent inflation readings have been mixed. The consumer price index fell last week For the first time in five months to 2.8% of 3%, an encouraging change. But it is likely that the Fed preferred price indicator, which will be launched at the end of this month, does not change.
The jump in inflation expectations is also a problem for the Fed because officials, including Powell, have said they are willing to allow inflation to gradually return to their 2% target in 2027, because expectations have generally been low. If other measures show that inflation concerns increase, Fed could suffer more pressure to reduce inflation more quickly.
“I worry when I see that consumer expectations move in the opposite direction,” George said. “I think you just have to watch that.”
The last time President Donald Trump imposed tariffs, in 2018 and 2019, general inflation did not increase much, partly because they were not as broad as what he is currently proposing and some tasks, such as steel and aluminum, were diluted with lagoons. Now that Americans have lived a painful inflationary episode, they are likely to be more scared about the increase in prices.
Powell sent such concerns in the comments earlier this month. He said tariffs could have a unique impact on prices without causing continuous inflation. But that could change “if it becomes a series” of tariff walks, he said on March 7, or “if the increases are larger, that would matter.”
“What really matters is what is happening with long -term inflation expectations,” Powell added.
A week after his comments, those expectations shot higher in the Survey of the University of Michigan.
