Stagflation is now America's best-case scenario
COMMENTARY
BY BILL DUDLEY Don't expect the
The only question now is how bad the damage will be.
The president's attack on free trade is truly extraordinary in 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 and as domestic producers, shielded from competition, take advantage of the situation to raise their prices as well.
Meanwhile, demand will decline. Businesses will delay investments amid uncertainty about the duration and breadth of tariffs and about the degree of foreign retaliation. People will cut back on spending as they adjust to what amounts to a tax hike of
Worse, the economy's ability to grow will be impaired. Deportations and a collapse of immigration will undermine the supply of workers, while productivity gains will slow. This will cut the sustainable rate of real output growth to about 1%, from 2.5% to 3% last year.
All told, stagflation is the optimistic scenario. More likely, the US will end up in a full-blown recession accompanied by higher inflation.
What, if anything, can the Fed do? It usually fights inflation with higher interest rates, which would deepen any recession. Chair
Yet there's ample reason to doubt that the Fed's conditions will be met. First, inflation has long been running above the central bank's 2% target. If it does so for the fifth consecutive year and even accelerates, there's a significant risk that inflation expectations will become unanchored.
Second, the type of shock matters. Ones that hurt productivity, as the US tariffs will, may have longer-lasting effects on inflation and expectations. Consider the twin oil-price shocks of the 1970s: Inflation proved persistent despite two recessions. Only by forcing the economy into a much deeper downturn, with short-term interest rates reaching nearly 20%, could the Fed (under then-Chair
Third, the Fed's own actions influence expectations. If people think the central bank is ignoring inflation pressures to focus instead on the growth side of its mandate, that perception alone can cause them to anticipate more inflation.
Inflation expectations play a crucial role in determining the cost of fighting actual inflation.
When they remain well-anchored, as in the past five years, the Fed can manage without pushing unemployment up too high. But if they rise, the sacrifice ratio increases sharply. In circumstances such as the 1970s oil shock, for example, the unemployment rate may need to rise 2 percentage points above its long-run level to reduce inflation by 1 percentage point in one year. In other words, recession becomes the Fed's only option.
This asymmetry means the Fed will have to be very careful as the US economy struggles.
Any easing of monetary policy that stokes inflation expectations will necessitate a much harsher and costlier tightening later.
Hence, I think investors are too optimistic about the likelihood of central bank support. On the contrary, the balance of risks and the high level of economic uncertainty justify a slower response.
The combination of slower growth, higher inflation and a stubborn Fed won't be good for stocks. It's a no-win situation. If companies pass along the cost of higher imports to consumers, inflation will be more persistent and the Fed less friendly. If they can't, profit margins will shrink and earnings will underwhelm.
Not to mention the risk of foreign tariff retaliation.
For bonds, the main issue will be the trajectory of short-term interest rates. Currently, markets are pricing in more than 100 basis points of easing this year. I think that's likely (and justified) only in the event of an actual economic downturn. This isn't 2019, when below-target inflation allowed the Fed to cut rates as "insurance" against recession. Nowadays, the world's most powerful central bank has a lot less room for maneuver.



Proxy Statement (Form DEF 14A)
Additional Proxy Soliciting Materials (Form DEFA14A)
Advisor News
- Worker retirement confidence dips to lowest level in a decade
- What’s behind private equity investment in insurance brokerages
- Advisors get a win as NJ Senate passes independent contractor bill
- Why federal retirement benefits are more complex than advisors realize
- Why timing the market is still a retirement mistake and what to do instead
More Advisor NewsAnnuity News
- Best’s Special Report: U.S. Life/Annuity Industry Sees Bottom-Line Growth Despite 18% Decline in Total Income in First-Quarter 2026
- Globe Life Inc. (NYSE: GL) Records 52-Week High Thursday Morning
- Fortitude Re Completes $500 Million FABN Issuance
- Reframing retirement income for greater certainty
- Jackson Introduces Dow Jones Industrial Average Index Option, Flexible Premiums, Six-Year Rate Guarantee in Latest Registered Index-Linked Annuity Launch
More Annuity NewsHealth/Employee Benefits News
- Hicks Thomas Continues Managed Care Growth with Addition of Veteran Trial Lawyer Mitch Reid
- Wyoming lawmakers mull solutions to rising healthcare costs
- Minnesota health insurers seek double-digit rate increases for 2027
- Outsider Zach Lahn couldn’t stop Montana Medicaid expansion
- California is getting ready to increase a health insurance tax. Will it affect your premium?
More Health/Employee Benefits NewsLife Insurance News
- Earl Dudley Jr. to Become Chief Human Resources Officer at Mutual of Omaha
- How accelerated underwriting is transforming life insurance
- OVER $107 MILLION IN LIFE INSURANCE BENEFITS LOCATED FOR TENNESSEANS IN 2025 THROUGH NAIC'S LIFE INSURANCE POLICY LOCATOR SERVICE
- Maryland Heights man pleads guilty in murder-for-hire death of his mom
- AM Best Affirms Credit Ratings of Everlake Life Group Members
More Life Insurance News