The FOMC released its latest monetary policy statement.  As was expected, the federal funds rate did not change and will stay in a range of 4.25% and 4.5%.

The sentence that is getting the most attention in the statement is the one that implies we are headed for stagflation – higher prices and reduced economic growth.

The sentence reads: “The Committee is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen.”

It wasn’t that long ago that Jerome Powell said that the Fed didn’t foresee stagflation as a problem, and he said that they didn’t really have a plan to deal with it.

Meanwhile, the Implementation Note states that the Fed will continue to reduce its balance sheet by $40 billion per month – $5 billion in Treasury securities and $35 billion in mortgage-backed securities.

It is still a complicated situation with a trend of lowering rates (temporarily on pause) and slight monetary deflation.

Powell vs. Trump

The fact that Powell and company aren’t lowering rates this time around and are continuing to reduce the balance sheet will only exacerbate the war of words between Powell and Trump.  Of course, Powell will be far more polite with his words.

Trump will blame a bad economy on Powell for not being ahead of the curve and lowering rates fast enough. Powell will blame Trump for imposing higher tariffs and making price inflation more persistent.

In a sense, they are both right, and they are both wrong.

Trump is right that rate cuts would boost the economy in the short run.  But it would just make the long-term pain that much worse.  It would be another kicking of the can down the road.

Powell is right that Trump’s tariffs will make some prices higher.  At the same time, it is the Fed that causes prices to go up virtually all the time.  Price inflation was a massive problem in 2022, and that didn’t have much, if anything, to do with tariffs.

We are in this bad position because of big spending politicians like Trump and central bankers like Powell who accommodate the deficit spending by creating money out of thin air.

They are both to blame, along with a lot of other people.  Trump is more to blame from his first term at this point (remember 2020?), but it’s not like he is getting spending under control now either.

1970s Stagflation Again?

It is impossible to predict the future, but I don’t think we are going to return to a version of the 1970s in the near term.

The Fed’s monetary policy at this point is much tighter than it was in the 1970s in general.  That’s not to say that the Fed can’t and won’t start ramping up the digital printing press again.

We are coming off of an inverted yield curve for almost two years (2023 and much of 2024).  The Fed is still deflating its balance sheet in the face of this.  This has recession written all over it.

But I don’t see the high price inflation like what happened in the 1970s.  It has come down since reaching a high of just over 9% in 2022.  I know there are arguments that it is understated, but I still don’t think it is anywhere near what it was in the 1970s when it was in the double digits.

With a recession, price inflation is likely to come down more.  Of course, this relief for the American consumer might be negated by the tariffs.  Still, when times get bad, expect demand for a lot of consumer products to go down.  Even with necessities like food, people will find cheaper alternatives.

If the Fed doesn’t go crazy with its money creation – and I know that is a big if – then expect price inflation to go down.  It doesn’t mean that prices will go down, but they should stop going higher as fast.

A recession is looking highly likely.  Powell is blaming Trump’s tariffs.  He will say that he wanted to lower rates sooner, but he just couldn’t do it because of the price pressures from the tariffs.

The next question is how the Fed will react once the recession hits.  It may depend on the severity and whether any major financial institutions are on the brink of failure.

Expect major economic trouble ahead, but not necessarily stagflation.  Maybe that will be later down the line.