An unsafe economic moment is a big test for the Fed

Just a few days after President Trump won the election in 2024, Jerome H. Powell, chairman of the Federal Reserve, asked a question of how the central bank would deal with a toxic combination of high inflation, stagnating growth and increasing unemployment.

“The entire plan is not a stagflation,” Powell told reporters. “Tap wood, we have come so far without seeing real weakening on the job market.”

Four months later, Mr. Trump's aggressive tariff expression, sloping and fire cuts in the federal government and the resulting frenzy on the financial markets brought feeding into an incredibly uncomfortable point.

Complete stagflation remains a remote view: the basis of the US economy is still solid and a big shock for crumbling will take. But what once seemed to be a historical, soft landing – with the Fed -Wreesting control of fast inflation, while it was holding the economy intact – is increasingly vulnerable.

When the FED completes its political session on Wednesday, interest rates are expected to be 4.25 to 4.5 percent stable. Mr. Powell recently reduced the need for an upcoming changes to the credit costs and said that the central bank was focused on separating the signal from the noise when it came to the policy of the Trump government. With the economy in a good place, the Fed is “well positioned to wait for greater clarity”.

However, if the economy begins to crack and the inflationary pressure grows – a situation that increasingly fear consumers – the political decisions of the Fed will take a completely new level of difficulty. This risks the central bank that it will better get into the cross hair of Mr. Trump.

“The FED certainly has a dilemma,” said Mahmood Pradhan, head of the Global Makro at the Amundi Investment Institute, a wealth manager. “The FED has no control over this background, no control over the political uncertainty and no control over the volatility of this discussion about tariffs. It is a very hard hand that they have been treated. “

Officials from the central bank are clever in avoiding questions about Mr. Trump and his politics. But the flood of actions that the Trump administration made in the first two months of its second term made it much more difficult.

The mere volume of the tariff threats alone exploded the selection of possible results for the economy. Even the most optimistic economists worked over the prospects. They also had to fight with the steep expenditure of Elon Musk and his Ministry of Government Efficiency and the prospects that millions of immigrants could be deported.

Mr. Trump's reluctance to rule out a recession, and a recent shift in the tone of his top consultants about the amount of pain that could be necessary to achieve a promised economic boom have reinforced the fears of how far the administration will go to advance his agenda. These fears were tightened last week when Mr. Trump released warning signs and the financial markets annoyed.

There is indications that the uncertainty about tariffs already begins to bite. According to a preliminary survey, which was carried out by the University of Michigan and published on Friday, a third month in a row appeared in March in a row.

According to the fact set, the tariff discussion about corporate results has increased, whereby the managing director is increasingly warning of the demand for demand and increasing prices. Optimism over the labor market has also faded, with a growing proportion of consumers surveyed by the Federal Reserve Bank of New York more unemployment and a worse financial situation in the coming year.

“Consumption, which has been the most important driver of the US economy in recent years, will not provide so much impulse,” said Marc Giannoni, a chief -US economist at Barclays, who used to work at the Fed regional banks in Dallas and New York.

Last week, Mr. Giannoni's team lowered its growth forecast for the United States' economy by almost a full percentage point, 0.7 percent on a fourth quarter of the fourth quarter to 0.7 percent. Economists from JPMorgan and Goldman Sachs have also moved their estimates in a similar direction, and quoted the tariffs and the expectation that the uncertainty of trade policy will deter the investments and the attitude of settings.

A disturbing sign is that you did this and at the same time increase your inflation forecast. The companies are on higher prices from Mr. Trump's tariffs that increase the costs of imported goods. Many have warned that they will probably pass these upper increase in increases in consumers.

Tom Madrecki from Consumer Brands Association said that the large food companies that represent their trading group, such as Pepsico, General Mills and Conagra Brands, could be violated if the products that are not easy to do are affected by tariffs.

“There is no profit in this situation,” he said. “There is no way that food prices do not rise, and at the same time consumers have clearly reached the fracture.”

The group recently wrote to Mr. Trump and asked for tariff exceptions for products such as coffee, cocoa and oats, which mainly come abroad.

Mr. Madrecki said an exception would make companies possible to “eat costs, which would be nothing in relation to the increase in jobs or that would continue to be able to invest in new facilities”.

The Americans already expect higher prices. The inflation expectations have risen sharply for the coming year as well as for a longer five-year horizon. Some economists play down how much a signal from these measures should be obtained, some of which is due to the increasingly party -political nature of some reactions. Market -based measures have also remained steady, even if survey -based measures have been shifted.

The extensive area of ​​answers about where inflation itself leads is reason to worry about others.

“There are enormous disagreements about what inflation can be and what this means in practice that inflation does not be anchored,” said Yuriy Gorodnichenko, economist at the University of California in Berkeley. “It is very easy to change the beliefs of people from one number to another because everyone is so unsafe and so confused.”

The development of inflation expectations will be crucial on how the Fed converts its political path. In the past, the central bank has argued that it can avoid reacting to an inflation induced by tariff, since this price pressure tends to be temporary. The FED reacted to growth problems that occurred during the last global trade war in Mr. Trump's first administration by reducing interest rates in 2019.

However, the central bank is at risk that it is more affected in its response to a weakening economy, since inflation is still above its target of 2 percent. This month, Mr. Powell said that the Fed's approach to navigate the tariffs ultimately depends on “what with long -term inflation expectations and how far the inflation effect would happen”, which indicates that the focus of the central bank remains mostly on price pressure.

Jon Faust, who recently was the leading consultant of Mr. Powell last year, said: “The only thing that is unacceptable is that inflation increases and the inflation expectations increase with it because this is appropriately regarded as the worst results that they cannot ultimately leave.”

An additional complication is Mr. Trump's preference to test the political independence of the Fed. While the President has not previously examined Mr. Powell and the political decisions of the FED as often as he did in his first term, he has tried to involve the institution more seriously by executive regulations.

“President Trump seems to be less limited by conventions than the last time,” said Faust, who is now in the Center for Financial Economics at John's Hopkins University. “It looks like the economic situation in relation to a slow economy and potentially tsarif -driven inflation orders could become slightly arbitrary. This is a recipe that very likely leads to a serious confrontation between the Fed and the administration. “