The Federal Reserve on Wednesday warned of an increased risk of stagflation from the Trump administration’s tariff plan as it left interest rates unchanged – despite growing pressure from the president to slash rates immediately.
“If the large increases in tariffs that have been announced are sustained, they are likely to generate a rise in inflation, a slowdown in economic growth and an increase in unemployment,” said Fed Chair Jerome Powell in laying out the conditions that characterize stagflation without using the term.
Powell’s dire warning came after the two-day meeting of the central bank’s policy-setting Federal Open Market Committee, which cited heightened economic uncertainty for its decision to keep the benchmark rate between 4.25% and 4.5%, where it has been since December.
In its policy note, the FOMC said that risks of higher inflation and unemployment have increased, and that some data has been impacted by “swings in net exports” — a nod to a shrinking GDP report last week as companies rushed to import goods ahead of Trump’s tariffs.
Wall Street’s – and Trump’s – hopes for a rate cut when the Fed next meets in June were also seemingly dashed after Powell said the costs of waiting to learn more about the economy were “fairly low.”
“We don’t feel like we need to be in a hurry. We feel like it’s appropriate to be patient,” he said. “And when things develop — of course we have a record of — we can move quickly when that’s appropriate.”
The Post reached out to the White House for comment.
The Dow was up 250 points, or 0.6%, before the Fed announcement at 2 p.m. and managed to hold on to most of the gains by the closing bell. The blue-chip index finished 284.97 points higher, while the S&P 500 and the Nasdaq Composite also ended in the green.
Trump has lashed out at Powell, calling him “a major loser” for not acting quicker to boost the economy, but on Monday backtracked on threats to fire the Fed chair.
Powell said Wednesday that Trump’s push to lower rates “doesn’t affect either our job or the way we do it.”
The Fed’s decision to extend its “wait-and-see” approach was widely expected in the wake of mixed economic data over the past few weeks and ongoing trade talks.
Investors expect the central bank to cut interest rates in the second half of the year.
However, by “that point it might be too late,” Chris Zaccarelli, chief investment officer at Northlight Asset Management, said in a note.
“The markets are going to increasingly worry about a recession and unless some trade deals are made before the tariff pause runs out, we are going to see markets drop again like they did in early April,” Zaccarelli said.
Inflation in March was 2.4%, down from 2.8% in February, but above the Fed’s target of 2%. The Consumer Price Index for April will be released next week.
Meanwhile, hiring remained relatively healthy in April as US employers added a better-than-expected 177,000 jobs, the Bureau of Labor Statistics said on Friday.
Gross domestic product unexpectedly fell 0.3% in the first three months of the year, seemingly fulfilling the Fed’s prediction in March of faltering economic growth, according to data released by the Commerce Department last week.
That dip into negative territory, though, is largely the result of a surge of imports as companies rushed to beat Trump’s tariffs.
Consumer sentiment has also tanked – plummeting 11% in April to 50.8, the second-lowest reading on record dating back to 1952, according to the University of Michigan’s survey.