Reference News Network reported on May 9 that according to a report from the Wall Street Journal website on May 7, Federal Reserve officials warned on the same day that due to tariff hikes, the U.S. economy is facing an increasing risk of rising unemployment and inflation.

Fed Chairman Jerome Powell said at a press conference, "If the significant tariff hikes already announced continue, they could lead to rising inflation, slower economic growth, and higher unemployment."

The impact of tariffs may increase prices while weakening the economy's ability to supply goods and services. The unpredictability of imposing tariffs on imported goods may erode corporate profits before companies clearly understand their underlying cost structures, thus inhibiting new investments.

The Fed finds itself in a dilemma as it must decide whether to focus more on the possibility of rising inflation or the risk of rising unemployment.

Former senior Fed advisor William English said, "Fed officials are in a difficult situation."

U.S. President Donald Trump withdrew his threat to fire Powell last month but continued to pressure the central bank leader to cut interest rates. In a recent televised interview, Trump said, "We have a stubborn Federal Reserve. He should cut rates. One day, he will."

Powell indicated that Fed officials believe the cost of waiting to learn more about the economy is "quite low"; this immediately reduced expectations for a rate cut at the next meeting in mid-June.

He said, "We think it is not necessary to rush into cutting rates; patience is appropriate. When circumstances change - as our track record shows, once the right time comes, we can act swiftly."

According to a report from the Frankfurter Allgemeine Zeitung website on May 7, the term "stagflation" did not appear in the official statement of the Fed. However, Fed Chairman Powell clearly stated at a press conference after a two-day Federal Open Market Committee meeting that this is precisely the situation the Fed officials are considering. Powell said that the risks of rising unemployment and inflation seem to have increased.

President Trump's imposition of tariffs and rates far exceeding expectations are the causes of this result. Powell stated that given extreme uncertainty, the Fed would maintain its benchmark interest rate unchanged again, i.e., within the range of 4.25% to 4.5%. Waiting and observing developments is the current working mode of the Fed officials, and they all voted unanimously to stay put.

When the economy stagnates and both unemployment and inflation rates rise, stagflation occurs. It is difficult to address stagflation using traditional tools of the central bank because the interest rate cuts that Trump publicly calls for to stimulate the economy might exacerbate inflation, while high interest rates would slow economic growth. History in the 1970s shows that resolving stagflation may take a long time. However, back then, the Fed officials were not fully prepared for such a situation. This time is different.

However, this has not made the Fed much easier. Ryan Sweet, chief economist at Oxford Economics, wrote that one difficulty may be that "the initial phase of tariffs will produce a deflationary effect within the next 1 to 2 months, followed shortly by a surge in inflation." Oxford Economics expects this situation to occur in the second half of this year.

However, the current U.S. economic data neither show a significant rise in inflation nor indicate a weakening economy. The latest growth data showed a contraction in the first quarter of the year, but it turned out to be misleading. The Fed believes that economic activity will continue to grow steadily, and the labor market is nearing full employment with an unemployment rate of only 4.2%.

However, what truly caused unease was the change in sentiment among consumers, entrepreneurs, and investors, which was triggered by Trump's tariff measures. They are now more pessimistic and anxious than at the beginning of the year. Therefore, Trump's restraint from attacking Fed Chairman Powell as an incompetent and always sluggish central banker before the close of the U.S. stock market can be seen as helpful in easing tensions and calming the markets. (Translated by Zheng Guoyi and Nie Litao)

On May 7, Federal Reserve Chairman Powell held a press conference after the Federal Open Market Committee meeting. (Associated Press)

Original article: https://www.toutiao.com/article/7502378600043004427/

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