A growing chorus of economists is sounding the alarm that stagflation — a toxic mix of sluggish growth, rising unemployment, and persistent inflation — is no longer a distant threat but the most probable path for the U.S. economy.
Reacting to the May Federal Open Market Committee meeting and Chair Jerome Powell’s remarks, economists viewed the Fed’s acknowledgment that “risks of higher unemployment and higher inflation have risen” as a clear admission that the economy has entered a stagflationary phase.
This unwelcome scenario that hasn’t dominated forecasts since the 1970s now sharply complicates the central bank’s policy path moving forward.
“The Federal Reserve left interest rates unchanged and signaled the higher probability of a stagflationary wind,” said Mohamed El-Erian, chief economic adviser at Allianz.
Justin Wolfers, a professor at the University of Michigan, summed up the concern in starker terms: “Never a good moment when your central bank says that it’s worried about both higher unemployment and higher inflation. That’s a problem that monetary policy alone can’t solve.”
Markets Rethink Rate Cut Timeline
Financial markets swiftly adjusted expectations for monetary easing. The probability of a 25-basis-point rate cut in June fell to 23%, down from 28% prior to Powell’s remarks, according …