Indeed, economic growth and inflation control go hand in hand: when activity accelerates, unemployment falls and inflationary risks increase, leading the Fed to raise its key rates. Conversely, a slowdown in the economy is often accompanied by a moderation in inflation, allowing the Fed to cut rates.
What is the situation today? At present, the US economic scenario seems to be becoming more complex. According to a majority of analysts, inflationary pressures are on the rise, while growth prospects are slowing. This worrying decoupling of inflation and growth is largely due to the trade tensions initiated by the Trump administration.
On 2 April, a date dubbed “Liberation Day” by Donald Trump, the , simultaneously heightening the risks of recession and inflationary expectations. Although a 90-day pause, excluding China, has been agreed to facilitate negotiations, the actual level of expected tariffs remains substantially high. China is particularly targeted, with tariffs of up to 145%.
Economic visibility obscured
These unpredictable announcements, between temporary exemptions and new threats, obscure economic visibility. Added to this is the US administration’s stated desire to weaken the dollar and its attempts to reduce public spending. As a result, businesses are now navigating through major economic uncertainty, which is naturally putting the brakes on their investment and hiring, thereby reducing short-term growth prospects.
Households, for their part, are also concerned by this situation. Fearing price rises and a potential deterioration in the job market, they are adopting a more cautious approach to consumption, which is further weakening growth.
In the end, this combination of uncertainty and trade tensions could lead to a rise in unemployment, amplifying the negative spiral on the economy.
In parallel, tariffs will have a direct impact on inflation. As imported products become more expensive, the additional costs will either have to be passed on in selling prices to consumers, or absorbed by a reduction in corporate profit margins. Analysts therefore estimate a potential increase in underlying inflation of around 1 to 2 percentage points. Admittedly, lower import volumes and possible substitutions may mitigate this effect slightly, but this is likely to remain marginal.
The Fed’s choice
It is in this complex context that the Fed must arbitrate its priorities: will it prioritise the fight against inflation or job protection?
Let us remember the tricky episode of 2021-2022, when the Fed initially described post-covid inflation as “transitory,” whereas it turned out to be much more persistent. Today, Fed chairman Jerome Powell is reaffirming his intention to keep inflationary expectations well anchored in order to prevent temporary price rises from becoming permanent. Especially since, according to Powell, the US economy remains relatively solid at the start of the year, with the unemployment rate still low at 4.2%.
As a result, the Fed already seems to have made an initial choice: to keep its key rates at their current level in order to prevent inflation from becoming entrenched, before possibly considering a cut if inflationary pressure were to diminish and employment were to deteriorate significantly. For the financial markets, this means that the famous “Fed put,” the implicit guarantee of intervention in the event of stock market turbulence, is out of the question in the short term. Only a return to greater economic clarity could calm the current volatility and reassure investors.
*Aykut Efe is economist & strategist at Spuerkeess Asset Management.
This article was originally published in .