MNI INTERVIEW: Tariffs Put Fed In Stagflationary Bind - Ex-CEA

The Federal Reserve is unlikely to soon step in an and save the U.S. economy with interest rate cuts as the Trump administration imposes sweeping tariffs that will raise prices, slow growth, and weigh on hiring, the former chair of the White House Council of Economic Advisers, Jared Bernstein, told MNI. 

"Stagflation is a particularly tough challenge for the Federal Reserve. If it was just slower growth, they could cut interest rates. But when it's slower growth and higher inflation, the interest rate cut is not necessarily the right medicine," he said in an interview.  

"There are serious concerns about where the U.S. and even the global economy is heading in the near term, all due to the tariff regime that the Trump administration has trotted out. Investors are deeply spooked by what they're seeing, and that bodes ill for future investments, for consumer spending, and for even growth rates going forward."

Bernstein does not yet believe markets are facing the sort of disruption that would necessitate central bank action to repair market functioning  -- and the Fed doesn't appear eager to prop up stock markets. "I also hear Chair Powell saying that he's not particularly enthusiastic about the Powell put." (See: MNI POLICY: Fed Forced Into Hawkish Stance Despite Growth Risk)

INFLATION EXPECTATIONS

Fed officials have noted short-term inflation expectations have been rising while long-term price views have remained mostly anchored. The University of Michigan's year-ahead inflation expectations jumped up from 4.3% last month to 5.0% and long-run inflation expectations surged to 4.1% in March, the highest since 1993. (See: MNI INTERVIEW: Inflation Expectations Worrisome For Fed- UMich) 

In the last few weeks, the Fed Chair's commentary about soft data has changed. Powell's "language has shifted a bit towards maybe giving the surveys a bit more weight, or just nervousness about expectations," said Bernstein, who chaired the CEA under President Joe Biden from 2023 to 2025. 

Slower growth and higher prices as a result of tariffs will likely come pretty quickly, Bernstein said. "That's tough for the Fed but it's a lot harder for households that are trying to get by."

He noted that some forecasters have lowered their growth outlook to around 0.5%, but cautioned in that scenario unemployment would rise. "If you have a GDP growth rate of half percent, that's not fast enough to keep the unemployment rate from rising."