The Federal Reserve Board (Fed) is officially avoiding expressions like 'recession' or 'stagflation,' but as the possibility of economic slowdown and rising prices occurring simultaneously increases, market concerns are growing.
According to The New York Times (NYT), after its regular meeting on the 18th (local time), the Fed downgraded its economic forecast for the U.S. GDP growth rate from 1.7% to 1.4% for this year. The consumer price inflation rate is expected to be 3%, exceeding the previous forecast of 2.7%. The unemployment rate was also revised upward from 4.4% to 4.5%.
This is interpreted as a precursor to the so-called 'stagflation' characterized by slowing growth and accelerating inflation. Although the Fed has not directly used the related terms, the perspective of viewing this as a 'mild stagflation' is spreading in the market. Joseph Brusuelas, chief economist at RSM, noted, 'This situation is not a full-blown stagflation, but it is heading in that direction.'
Stagflation generally refers to the phenomenon where economic growth stagnates while high prices occur simultaneously. In the United States, two oil price spikes in the 1970s triggered stagflation, and more recently, Russia's invasion of Ukraine in 2022 caused a surge in energy and food prices, stimulating inflation.
This time, geopolitical tensions triggered in the Middle East have emerged as a variable. With increasing possibilities of full-scale war between Israel and Iran, international oil prices are rising, and there are concerns that prolonged warfare could shock the global economy. Former Fed Vice Chairman Alan Blinder (currently a professor at Princeton University) said, 'Historically, the major shocks that triggered global economic recessions mostly stemmed from surges in oil prices.'
The problem is that the Fed's policy responses have become complicated. The Fed has been responding by raising rates in response to rising prices and lowering rates during recessions. However, when both prices and unemployment rates rise simultaneously, it becomes challenging to determine a direction. Brusuelas warned, 'The Fed cannot tighten and ease at the same time,' adding that acting late on both could worsen inflation and exacerbate the recession.
Fed Chair Jerome Powell did not directly mention the word stagflation during a press conference that day. However, he cautioned that President Trump's trade policies and tariffs could stimulate prices. Powell remarked, 'Someone has to pay the price of tariffs,' indicating a cautious stance on interest rate cuts.