Trapped by Trade: Powell’s Stagflation Dilemma
The Fed Is Stuck Between Inflation and Slowdown—and Trump’s Tariffs Aren’t Helping
Federal Reserve Chair Jerome Powell didn’t say the word “stagflation” outright. But he didn’t have to.
At this week’s policy meeting, the Fed held rates steady once again, keeping its benchmark range at 4.25% to 4.5%.
The official line? Wait for more data.
The unspoken truth?
The Fed is cornered—caught between rising inflation and a softening economy, with little room to maneuver. And President Trump’s escalating tariff war may be pushing the economy closer to a scenario policymakers dread: stagflation.
No Good Options, Just a Slow Squeeze
In ordinary times, monetary policy is a balancing act. Cut rates when the economy slows. Hike them when inflation rises. But these aren’t ordinary times. When both inflation and unemployment threaten to rise together, the Fed’s tools start to work against each other.
That’s what makes stagflation so dangerous—and so hard to manage. If the Fed cuts rates to support jobs, it risks fueling inflation. If it raises rates to fight inflation, it may tip a fragile labor market into recession.
For now, Powell is choosing caution. “Our policy rate is in a good place,” he said, signaling no rush to move in either direction. But that stability may not last if the worst-case scenario becomes reality.
The Tariff Effect
Trump’s trade war isn’t just a sideshow—it’s a central part of the problem.
Tariffs are inherently inflationary. They raise the cost of imported goods, feeding directly into consumer prices. But they’re also disinflationary for growth, discouraging investment and sowing uncertainty among businesses. Companies are rethinking hiring. Capital spending is slowing. And the surge in imports ahead of tariff deadlines has widened the trade deficit, dragging down GDP.
In short: Trump’s tariffs are pushing the economy in two directions at once—exactly the kind of environment the Fed is least equipped to manage.
Labor Market: Holding the Line (for Now)
One reason Powell hasn’t flinched yet is the still-solid job market. April saw 177,000 new jobs, and the unemployment rate held steady at 4.2%. By most measures, the labor market looks healthy. That’s buying the Fed time.
But time may be running out. Jobless claims are creeping higher. Sentiment among consumers and business leaders is deteriorating. And if unemployment starts to rise meaningfully while inflation remains sticky, the Fed will have to act—one way or another.
What This Means for Investors
Markets are already feeling the tension, but if stagflation risks deepen, investors may start repositioning more aggressively. Hard assets, including commodities and precious metals, tend to fare better when inflation lingers. Treasury Inflation-Protected Securities (TIPS) could regain attention as a defensive tool. On the equity side, companies with pricing power and global revenue exposure may outperform those tied to domestic discretionary spending.
Meanwhile, speculative tech and rate-sensitive sectors could come under pressure if the Fed finds itself unable to ease. In a stagflationary world, capital preservation and inflation resilience—not just growth—become top priorities.
Waiting for the Picture to Clear
For now, Powell says the Fed is “awaiting further clarity.” But clarity may not come. Trade policy remains unpredictable. The labor market could deteriorate faster than expected. Inflation might spike again on another round of tariffs.
And if all of that happens at once, the Fed will be forced off the sidelines—into an environment with no clean choices, just tradeoffs.
That’s the reality of stagflation. It doesn’t knock politely. It creeps in quietly, until the central bank can no longer pretend it has time. Powell is trying to buy that time now. But the clock is ticking—and the next move may not be his to choose.
Disclaimer: This analysis is for informational purposes only and does not constitute financial advice. Investors should conduct their own due diligence and consult with a financial advisor before making investment decisions.