Federal Reserve hints at rising risk of stagflation in US economy

US Federal Reserve has hinted at the probability of a modest stagflation hitting the US economy in 2025. Stagflation is high inflation along with high unemployment and low economic growth, all at the same time. In its monetary policy statement released yesterday, the US central bank projected 1.4% GDP growth rate for US economy in 2025. It estimated that unemployment rate will rise to 4.5% by the end of the year and inflation rate will rise to 3%. So inflation rate and unemployment rate are both expected to rise simultaneously.

In economies, like the US economy, where inflation usually is not supply side driven but demand side driven, inflation rate and unemployment rate usually hold an inverse relationship. When unemployment rate goes up, inflation rate tends to go down, and vice-versa.

Federal Reserve keeps benchmark interest rate unchanged

US Federal Reserve kept its benchmark interest rate unchanged in its monetary policy meeting yesterday. It kept the benchmark federal funds rate in the range of 4.25% – 4.50%.  The central bank said that it still expects further interest rate cuts of 0.5% in 2025. It expects a 0.25% interest rate cut in 2026 and another 0.25% interest rate cut in 2027.

Had it not been for higher import tariffs, it would have been an interest rate cut

US Federal Reserve Chairman Jerome Powell said that had it not been for Trump tariffs, the Federal Reserve would have gone for an interest rate cut this time. But tariffs are going to put upward pressure on inflation rate in the coming months, he said. So the Federal Reserve had to keep interest rate cuts on hold and adopt a wait-and-watch mode.

Regarding the rise in oil prices due to Israel, Iran war, Powell said such a price rise will not have a lasting impact on inflation rate in United States.

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Source: US Federal Reserve