A few days after President Trump won the 2024 elections, Jerome H. Powell, president of the Federal Reserve, avoided a question about how the Central Bank would deal with a toxic combination of high inflation, stagnating growth and increased unemployment.
“The whole plan is not to have stagflation,” Powell told journalists. “Touching wood, we have gone so far without seeing a real weakening in the labor market.”
Four months later, the aggressive tariff pronouncements of Mr. Trump, the cutting and burning cuts to the federal government and the resulting frenzy in the financial markets have put the Fed in an incredibly uncomfortable place.
Direct stagflation remains a remote perspective: the basis of the economy of the United States remains solid, and will be surprised a lot to crumble. But what once seemed to be a gentle historical landing, with the control of the Fed for the control of rapid inflation while keeping the economy intact, it seems increasingly vulnerable.
When the Fed concludes its policy meeting on Wednesday, it is widely expected to keep stable interest rates at 4.25 to 4.5 percent. Mr. Powell recently minimized the need for any imminent change to loan costs, saying that the Central Bank focused on “separating the noise signal” when it came to Trump administration policies. With the economy in a good place, he said, the Fed is “well positioned to expect greater clarity.”
But if the economy begins to creak and inflationary pressures grow, a situation that consumers fear more and more, the political decisions of the Fed will acquire a completely new degree of difficulty. That runs the risk of putting the central bank more directly on the cross of Mr. Trump.
“The Fed certainly has a dilemma,” said Mahmood Pradhan, chief of Macro Global at the Amundi Investment Institute, an asset manager. “The Fed has no control of this backdrop, there is no control of political uncertainty or the control of the volatility of this discussion about tariffs. It is a very difficult hand that have been treated.”
The officials of the Central Bank have become skilled by avoiding questions about Trump and their policies. But the burst of actions carried out by the Trump administration in the first two months of its second mandate has made much more difficult to do.
The great volume of tariff threats has only exploited the range of possible results for the economy. That has even shaken the most optimistic economists about perspectives. They have also had to deal with the steep cuts of expenses made by Elon Musk and their government efficiency department and the perspectives that millions of immigrants could be deported.
The reluctance of Mr. Trump to rule out a recession, and a recent change in the tone of its main advisors about the amount of pain that may be necessary to achieve a promised economic boom, has amplified fears on how far the administration will come to boost its agenda. Those fears were exacerbated last week when Trump dismissed the warning signals, disconcerting of financial markets.
There is evidence that uncertainty about tariffs is already beginning to bite. The feeling of the consumer fell in March for the third consecutive month, according to a preliminary survey conducted by the University of Michigan and published on Friday.
Talk Talk has shot in corporate gains calls, according to Factset, with executive directors who warn more and more about demand for demand and increased prices. Optimism on the labor market has also faded, with a growing part of consumers surveyed by the New York Federal Reserve Bank, now they expect greater unemployment and a worst financial situation in the following year.
“The consumption, which has been the key driver of the US economy in recent years, will no longer provide so much impulse,” said Marc Giannoni, chief economist of the United States in Barclays, who previously worked in the regional banks of the Fed in Dallas and New York.
Last week, Mr. Giannoni’s team reduced its growth forecast for the United States economy at almost a complete percentage point, to 0.7 percent on a fourth and fourth base. JPMorgan and Goldman Sachs economists also moved their estimates in a similar direction, citing tariffs and the expectation that a greater uncertainty of commercial policy will dissuade investment and hiring.
A worrying signal is that they did it while raising their forecasts for inflation. Companies are preparing for higher prices of Trump tariffs, which will increase the costs of imported goods. Many have warned that they are likely to transmit those increases to consumers.
Tom Madrecki, of the Association of Consumer Brands, said that the large food companies represented by their commercial group, such as Pepsico, General Mills and Conagra Brands, could be injured if the products they use that are not easily obtained are found in the country with rates.
“There is no profits in this situation,” he said. “There is no way that the prices of the groceries do not increase and, nevertheless, at the same time, consumers have clearly reached the point of rupture.”
The group recently wrote to Mr. Trump asking for tariff exemptions on products such as coffee, cocoa and oatmeal, which are obtained mainly abroad.
Mr. Madrecki said that an exemption would allow companies to avoid having to “eat a cost, which is not going to do anything in terms of increasing work or continuing to be able to invest in new facilities.”
Americans are already beginning to wait for higher prices. Inflation expectations have increased abruptly, both for the following year and for a longer horizon of five years. Some economists minimize the amount of signal that must be obtained from these measures, partly due to the increasingly partisan nature of some of the answers. Market -based measures have also remained stable even as surveys have changed.
But the wide range of answers about where inflation is directed in itself is a matter of concern for others.
“There is a huge disagreement about what inflation can be, and what this means in practice is that inflation expectations are not anchored,” said Yuriy Gorodnicenicenko, economist at the University of California, Berkeley. “It is very easy to change the beliefs of people from one number to another, because all are very uncertain and so confused.”
The way in which inflation expectations evolve will be essential for how Fed describes its path of politics. Historically, the Central Bank has argued that it can avoid responding to inflation induced by the rate because these price pressures tend to be temporary. The Fed responded to the growth concerns that emerged during the last World Trade War in the First Trump administration by reducing interest rates in 2019.
But the Central Bank runs the risk of being more heir in its response to a weakened economy because inflation is still trapped above its 2 percent objective. Mr. Powell said this month that the Fed approach to navigate the tariffs would ultimately depend on “what is happening with longer -term inflation expectations and how persistent are the inflation effects”, which suggests that the focus of the Central Bank remains predominantly in price pressures.
Jon Faust, who was the main advisor of Mr. Powell as recently as last year, said: “The only thing that is unacceptable is the increase in inflation and inflation expectations that increase with him, because that is appropriately seen as the worst of all the results that can finally be allowed to pass.”
An additional complication is Mr. Trump’s inclination to prove the political independence of the Fed. While the president has so far refrained from commenting as often as he did during his first mandate about Mr. Powell and the political decisions of the Fed, he tried to invade the institution more seriously through executive orders.
“President Trump seems to be less limited by the conventions than the last time,” said Faust, who is now at the Financial Economy Center of the Johns Hopkins University. “It seems that the economic situation could become more tense in terms of a deceleration economy and increases potentially driven by the rate in inflation. That is a recipe that is very likely to lead to a serious confrontation between the Fed and the Administration.”
