Stagflation, a period of both high inflation and high unemployment, is gaining attention as the US economy faces potential risks amid President Donald Trump’s tariff policies. While economists warn that the situation may be worse than the 1970s, they also emphasize that the current scenario is unlikely to repeat the severe economic conditions of that era.
Federal Reserve officials have reassessed their forecasts, pointing towards higher inflation and unemployment rates in the near term. Policymakers expect two quarter-point interest rate cuts by year-end but acknowledge the uncertainty surrounding the impact of tariffs on the economy.
The Trump administration’s trade policies are seen as a major contributor to these concerns. Economists believe that rising tariffs will lead to price increases, reducing output and exacerbating unemployment. Chicago Fed President Austan Goolsbee warned that higher tariffs create a stagflationary impulse, where both inflation and employment suffer simultaneously.
Federal Reserve Chair Jerome Powell expressed concern about the potential for public psychology to drive inflation expectations. He noted that past experience with high interest rates and recessions has helped establish credibility and reset expectations, ensuring stable inflation expectations remain under control.
Powell emphasized that the Fed will closely monitor the situation and take necessary actions to address stagflationary risks. However, economists caution that the outcome remains unpredictable due to the scope and breadth of Trump’s trade policies.
In contrast to the 1970s, where a surge in unemployment and inflation combined to create a unique economic crisis, the current scenario is characterized by solid hard macroeconomic data but softer measures like sentiment sliding. Policymakers will need to balance controlling inflation with sustaining employment, making it essential to carefully monitor the situation and adjust policies accordingly.
While stagflation risks are present, economists stress that the US economy is unlikely to fully repeat the severe conditions of the 1970s. By understanding the role of public psychology in shaping inflation expectations and taking proactive steps to address these concerns, policymakers aim to prevent a similar economic crisis from unfolding.
Source: https://www.reuters.com/markets/us/stagflation-radar-us-economy-no-repeat-70s-2025-03-25