Powell finally admits what markets feared all along

Fed Chair Jerome Powell is no longer dismissing the risk of stagflation, nearly a year after brushing it off with his now-notorious line: “I don’t see the ‘stag,’ nor the ‘flation.’”

Now he does.

The about-face comes as concern grows inside the Fed over the fallout from Trump’s trade war, which has rattled markets and pushed the economy closer to the worst-case combo: rising prices and slowing growth.

“If the large increases in tariffs that have been announced are sustained, they are likely to generate a rise in inflation, a slowdown in economic growth, and an increase in unemployment,” Powell said Wednesday after the Fed voted to keep rates steady.

That triple threat — inflation, weak growth, and rising joblessness — is textbook stagflation, a rare and stubborn economic mess last seen in the 1970s.

Stagflation is dangerous because it leaves the Fed boxed in.

Cutting rates might support the economy but risks stirring up inflation. On the flip side, keeping rates high could weigh down prices but at the expense of choking off growth.

“Central bankers are in a bind,” said Chris Zaccarelli, CIO at Northlight Asset Management. “You’ve got inflation and a slowing economy pulling them in two opposite directions.”

Matthew Pallai at Nomura called it “a tricky spot,” as the Fed tries to hit its two core targets: stable prices and full employment.

Trump turns up the heat

As the Fed treads carefully, Trump is publicly demanding rate cuts and blaming Powell for falling behind the curve.

In a post on Truth Social on Thursday, Trump slammed the Fed chair, calling him “too late Powell” and claiming inflation isn’t a problem.

“Oil and Energy [are] way down, almost all costs (groceries and ‘eggs’) [are] down,” Trump wrote, arguing the U.S. economy has “virtually no inflation.”

Economists aren’t entirely on board with Trump.

Goldman Sachs expects inflation to rebound in the second half of the year, driven by tariffs. The bank now sees core PCE — the Fed’s go-to inflation yardstick — climbing to 4% by June 2026. That’s double the Fed’s target.

Goldman also warned that the biggest price spikes will likely hit clothing, consumer electronics, and cars, the kinds of goods directly hit by tariffs.

On the other side of the stagflation equation, Goldman says the U.S. is on track for the slowest GDP growth among developed economies this year.

The Fed may have dodged a recession last year, but the chickens are coming home to roost — and now policymakers are dealing with something worse, with fewer tools left to fight it.