What is stagflation? Why the Fed is facing tough decisions this week

WASHINGTON - As the Federal Reserve prepares for its March policy meeting, officials are navigating growing concerns about stagflation—a mix of high inflation and slowing economic growth.

Just seven weeks ago, the economic outlook seemed stable, with strong hiring, steady growth, and declining inflation. Now, new inflation data, rising tariffs, and falling consumer confidence have raised uncertainty about how the Fed should proceed.

While the Fed is widely expected to keep interest rates unchanged this week, the meeting will provide key insights into how policymakers view inflation risks and potential rate cuts later this year.

What is stagflation, and why is it a concern now?

The backstory:

Stagflation occurs when inflation remains high even as economic growth slows or stagnates. This was a defining issue for the U.S. economy in the 1970s, when deep recessions failed to bring inflation down.

The current economic landscape shows some warning signs:

• Inflation remains above the Fed’s 2% target.
• Consumer and business confidence have dropped.
• Tariffs and government spending cuts could weaken growth.

The challenge for the Federal Reserve is balancing these pressures. Typically, the Fed would cut interest rates to boost a slowing economy, but if inflation stays high, reducing rates could worsen price pressures.

What will the Fed decide this week?

Timeline:

Fed officials had previously signaled two rate cuts in 2024, but some analysts believe slowing growth could force additional reductions.

• The Fed’s two-day meeting begins Tuesday, March 19 and ends Wednesday, March 20.
• The central bank is expected to keep interest rates steady for now.
• The Fed will release its quarterly economic projections, showing expectations for inflation and interest rates.
• Wall Street expects three rate cuts this year, in June, September, and December.

What is driving inflation concerns?

By the numbers:

Inflation data has been mixed:

• The consumer price index (CPI) dropped to 2.8% last month, the first decline in five months.
• The Fed’s preferred inflation measure (to be released later this month) is expected to remain unchanged.
• Consumer inflation expectations jumped in the University of Michigan survey, marking the largest increase since 1993.

The rise in inflation expectations is a problem for the Fed because consumer fears about higher prices can become self-fulfilling. If businesses expect inflation to worsen, they may raise prices preemptively, while workers demand higher wages, keeping inflation elevated.

How could tariffs and government spending impact the economy?

The other side:

Beyond inflation, the Federal Reserve is also watching how tariffs and government spending cuts could slow economic growth.

President Donald Trump’s new tariff proposals could raise costs on imported goods, potentially adding to inflation pressures.

• Trump’s previous tariffs (2018-2019) had a limited impact on inflation, but current proposals are broader and could have a larger effect.
• Fed Chair Jerome Powell has warned that tariffs could have a one-time inflationary effect but might not lead to ongoing price increases—unless new tariffs keep coming.

At the same time, cuts to government spending and rising job losses could weaken economic growth, adding to stagflation risks.

What’s next for the Fed?

Big picture view:

Fed officials will likely signal that interest rate cuts are coming, but they remain cautious. While inflation appears to be easing, the jump in consumer expectations and the impact of tariffs and economic uncertainty could complicate their decisions.

Investors and analysts will watch closely to see whether the Fed sticks with its projection of two rate cuts or signals a shift in strategy. Powell’s press conference on Wednesday afternoon will provide further insights into the Fed’s outlook for the rest of the year.

EconomyMoney