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When Federal Reserve officials last met in late January, things looked pretty good: Hiring was solid. The economy had just grown at a solid pace in last year’s final quarter. And inflation, while stubborn, had fallen sharply from its peak more than two years ago.
What a difference seven weeks makes.
As the Fed prepares to meet Tuesday and Wednesday, the central bank and its chair, Jerome Powell, are potentially headed to a much tougher spot. Inflation improved last month but is still high and tariffs could push it higher. At the same time, ongoing tariff threats as well as sharp cuts to government spending and jobs have tanked consumer and business confidence, which could weigh on the economy and even push up unemployment.
The toxic combination of still-high inflation and a weak or stagnant economy is often referred to as “stagflation,” a term that haunts central bankers. It is what bedeviled the U.S. in the 1970s, when even deep recessions didn’t kill inflation.
Stagflation, should it emerge, is hard for the Fed because typically policymakers would lift rates—or keep them high—to combat inflation. Yet if unemployment also rises, the Fed would usually cut rates to reduce borrowing costs and lift growth.
It’s not yet clear whether the economy will sink into stagflation. For now, like businesses and consumers, the Fed is grappling with a huge amount of uncertainty surrounding the economic outlook. But even a mild version—with unemployment rising from its current low level of 4.1% and inflation remaining above the Fed’s 2% target—would pose a challenge for the central bank.
“That’s the tangled web they’re in,” says Esther George, former president of the Federal Reserve’s Kansas City branch. “You have inflation stickiness on the one hand. At the same time, you’re trying to look at what impact could this have on the job market, if growth begins to pull back. So it is a tough scenario for them for sure.”
