Stagflation Is the Best Scenario a Tariff-Hit US Can Now Expect

It's catch-22 for the Fed as fighting inflation will constrain growth

- BILL DUDLEY

Don't expect the Federal Reserve to rescue the US economy from the epic tariffs imposed by the Trump administration on imports from most of the world. The only question now is how bad the damage will be.

The US President's attack on free trade is truly extraordinary in its scope, scale and lack of nuance. The weighted-average tariff will likely climb to 25% or more of the value of imports this year, from less than 3%. This increase amounts to more than 10 times what Trump did in his first term.

The impact will be devastating. Over the next six months, annualized inflation will likely climb to nearly 5%, as tariffs boost import prices. Plus, domestic producers shielded from competition may raise their prices as well.

Meanwhile, demand will decline. Businesses will delay investments amid uncertainty about the duration and breadth of tariffs and the degree of foreign retaliation. People will cut back on spending as they adjust to what amounts to a tax hike of $600 billion or more. This is likely even if the US Congress offsets tariffs with tax cuts elsewhere—because there will be a considerable lag, and because low-to-moderate-income families, which tend to spend more of their income, will be hurt by tariffs more than helped by income-tax relief.