Jamie Spencer
When Federal Reserve officials last met in late January, the economic picture looked relatively strong: Hiring was solid, growth was steady, and inflation had cooled from its peak two years ago.
Seven weeks later, the landscape has shifted dramatically. As the Fed meets this Tuesday and Wednesday, policymakers face mounting economic uncertainty. Inflation remains high and could rise further due to tariffs, while consumer confidence has plunged amid fears of job losses and spending cuts. These factors could drag down economic growth and even push unemployment higher.
Stagflation Fears Are Growing
The Fed’s current dilemma mirrors the economic struggles of the 1970s stagflation era, where inflation remained high even as growth stalled. Typically, the Fed would raise rates to curb inflation. But if unemployment rises, it would usually cut rates to support the economy. Balancing these two forces presents a major challenge.
“That’s the tangled web they’re in,” said Esther George, former president of the Federal Reserve’s Kansas City branch. “You have inflation stickiness on the one hand. At the same time, you’re trying to look at what impact this could have on the job market.”
Fed Likely to Hold Rates Steady
Fed officials are expected to keep interest rates unchanged at this week’s meeting. Their latest economic projections—due Wednesday—will likely still indicate two rate cuts this year, in line with their December forecast.
However, Wall Street investors anticipate three rate cuts—in June, September, and December—amid growing fears of an economic slowdown.
Inflation Expectations Are Rising
A troubling sign for the Fed is the recent jump in inflation expectations. The University of Michigan’s consumer sentiment survey showed the largest increase in long-term inflation concerns since 1993. If Americans expect higher prices, they may demand higher wages, forcing businesses to raise prices and creating a cycle of inflation.
Some economists caution that the survey is preliminary, but it underscores the risks ahead.
Trump’s Tariffs Add Complexity
President Donald Trump’s latest tariffs could also disrupt inflation. When he imposed tariffs in 2018-2019, inflation remained manageable because they were limited in scope. This time, the measures are much broader, and consumer sensitivity to price increases is higher after years of inflation struggles.
“Tariffs could have a one-time impact on prices without causing ongoing inflation,” Fed Chair Jerome Powell said on March 7. “But if it turns into a series of hikes or if the increases are larger, that would matter.”
A week after Powell’s remarks, inflation expectations spiked.
What’s Next for the Fed?
The Fed will need to weigh rising inflation concerns against the risks of slower economic growth. If the economy weakens further, pressure for rate cuts will increase. However, if inflation remains stubborn, the Fed may have to delay those cuts.
