Economists, including former PIMCO CEO Mohamed El-Erian, believes the central bank should prioritize tackling inflation.
by Shreyas Sinha
Observer
President Trump’s tariff announcements have simultaneously raised inflation expectations and dampened economic prospects—so much so that former New York Fed President Bill Dudley wrote that “stagflation is now America’s best-case scenario.” Stagflation, the combination of high inflation and slow growth, is among the most difficult for the Federal Reserve to manage: contractionary policy may tame inflation but slows growth further, while expansionary moves risk fueling inflation without the guarantee of boosting the economy. Every option, in effect, becomes a double-edged sword.
The central bank is meeting on May 7 to determine its next step on interest rates. Currently, markets expect rates to stay the same after the May meeting but a 60 percent chance of a 25 basis-point cut in June, according to the CME Group’s FedWatch. Such expectations reflect “how they have been trained repeatedly by the Fed to expect looser financial conditions the minute there are any signs of unusual market volatility,” the economist Mohamed El-Erian wrote in a Bloomberg op-ed last week.