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Abstract:Stubborn inflation and slowing growth leave the Fed stuck between a rock and a hard place, with limited room to maneuver.
The U.S. economy appears to be drifting into stagflation territory—persistent inflation combined with slowing growth. Although official metrics like core PCE show inflation leveling off, market-based and survey-based expectations are creeping up. The University of Michigan's latest survey shows 5-year inflation expectations climbing to the highest level since 2023, a worrying sign for policymakers.
Economic momentum is also losing steam. Consumer spending is showing signs of fatigue, the housing recovery has plateaued, and manufacturing remains in contraction. Businesses are hesitant to invest amid high borrowing costs and persistent wage pressures. Externally, geopolitical frictions—particularly U.S.-China trade tensions—have increased supply chain uncertainties, keeping input prices elevated and inflation sticky.
Fed Chair Jerome Powell acknowledged this twin challenge in his latest remarks, stressing that the central bank is now facing a “two-sided risk.” On one hand, inflation has not come down as quickly as hoped. On the other, growth is clearly slowing, and labor market resilience is beginning to fray. If both inflation and unemployment rise in tandem, the Feds dual mandate—price stability and full employment—will come into direct conflict.
Making matters worse, the U.S. fiscal picture is deteriorating. Though the immediate threat of default has passed, rising debt levels and mounting interest payments limit the government's ability to support growth through stimulus. Powell renewed his warning about unsustainable deficits, urging Congress to take proactive steps to restore fiscal discipline.
In terms of policy, the Fed has adopted a wait-and-see posture. While markets had priced in rate cuts for 2024, Powell continues to signal that rates will remain “higher for longer” until inflation shows clear signs of subsiding. He also dismissed speculation of a “Fed Put,” indicating that the central bank would not intervene in equity markets and would instead stay focused on the real economy.
In sum, the Fed is navigating a highly uncertain environment. Its next moves will hinge heavily on incoming data—especially inflation and labor reports. Should the economy weaken faster than expected, the Fed may be forced to ease earlier than planned, even if inflation remains above target. For now, Powell is walking a tightrope, balancing competing risks with limited room to maneuver.
Disclaimer:
The views in this article only represent the author's personal views, and do not constitute investment advice on this platform. This platform does not guarantee the accuracy, completeness and timeliness of the information in the article, and will not be liable for any loss caused by the use of or reliance on the information in the article.
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