Inflation up, jobs down? The Fed braces for the possibility of stagflation as Trump’s sweeping tariffs disrupt the economy.

Federal Reserve Chair Jerome Powell delivered his bluntest warning yet on Wednesday, saying that President Donald Trump’s aggressive tariff policies could send the U.S. economy into a tailspin — one the Fed may not be fully equipped to handle.

Speaking at an event hosted by the Economic Club of Chicago, Powell called the tariffs a “very fundamental policy change” with no modern precedent.

“There isn’t a modern experience of how to think about this,” Powell said, noting that the scale of tariff hikes has far exceeded expectations.

Powell outlined a troubling scenario where tariffs could slow economic growth, drive up inflation, and raise unemployment — all at once. That’s a worst-case combination the U.S. hasn’t seen in nearly half a century.

“We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension,” he said, referring to the Fed’s mandate to ensure both low inflation and full employment.

Markets didn’t take the news lightly. As Powell spoke:

• The Dow dropped 700 points (1.7%)
• The S&P 500 fell 2.5%
• The Nasdaq sank 3.5%

Trump’s tariffs, either already in place or on the way, include:

• 25% tariffs on steel, aluminum, and autos
• 145% duty on Chinese imports
• 25% tariffs on goods from Mexico and Canada that don’t meet trade terms
• A 10% baseline tariff on all U.S. imports
• Potential new tariffs on semiconductors, pharmaceuticals, copper, and timber

Some exemptions have been granted for electronic goods, but the economic toll is mounting — and the American public is footing part of the bill, Powell noted.

“Unemployment is likely to go up as the economy slows,” Powell said.
“In all likelihood, inflation is likely to go up as well… A portion of the burden of tariffs is going to be paid by the public.”

Despite the warning signs, Powell said the Fed isn’t rushing to make a move. Instead, policymakers are holding off on interest rate changes until the economic picture becomes clearer.

“Waiting for additional data will help inform the path ahead,” said Cleveland Fed President Beth Hammack.

But economists are worried that if Trump’s postponed tariffs — like the ones delayed until July — do take effect, the damage could accelerate quickly.

Many economists fear the country could slide into stagflation, a dreaded mix of slow growth, rising unemployment, and high inflation not seen since the 1970s and 1980s.

“A tariff is like a negative supply shock,” said Chicago Fed President Austan Goolsbee.
“Prices go up while jobs are lost and growth slows — that’s a stagflationary shock.”

Back in the ’80s, then-Fed Chair Paul Volcker responded to stagflation by aggressively raising interest rates, which tamed inflation but also caused a recession. Powell now faces a similar dilemma: fight inflation at the risk of hurting jobs, or vice versa.

“We would consider how far the economy is from each goal, and the different time horizons to close those gaps,” Powell said.
“We understand how painful high inflation or high unemployment can be for families and businesses.”

The Fed’s next steps will hinge on economic indicators — especially consumer sentiment, inflation expectations, and the job market. The University of Michigan’s consumer survey already shows declining confidence in price stability.

While inflation is down from its 2022 peak, it’s still slightly above the Fed’s 2% target, giving policymakers less room to maneuver.

“This is a difficult set of risks for monetary policy to navigate,” Hammack said. “There is a strong case to hold steady and let the data guide us.”

Source: CNN – Fed Chair Powell gives starkest warning yet on potential economic consequences from tariffs

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In a move set to affect American consumers at the gas pump, new tariffs on products imported from Canada will soon lead to a price increase of 15 cents per gallon or more. The Trump administration announced the tariffs on US imports from Canada and Mexico on Saturday, with implementation set for Tuesday. The move marks a significant step in President Donald Trump’s ongoing efforts to challenge trade practices with America’s two largest trading partners.

Though the tariffs are expected to impact a wide range of goods—from cars to lumber to agricultural products—gasoline and other energy-related products could see some of the quickest price hikes.

Gasoline Prices to Rise, But Not as Much as Expected

The tariff imposed on energy products is set at 10%, which is relatively lower than the 25% tariff on other goods. This decision was made in an attempt to limit the impact on American consumers, who would otherwise face even higher gas prices and heating oil costs. Despite the effort to cushion the blow, the effect at the pump is still expected to be noticeable in the coming days.

A senior Trump administration official explained that the 10% tariff on energy products aims to “minimize disruptive effects” on fuel prices. However, as history shows, tariffs are typically passed on to consumers in the form of higher prices.

Price Increases Already Seen in Wholesale Gasoline

Even before the tariffs take effect, gasoline prices have already risen. On Monday morning, wholesale gasoline prices jumped by 8 cents per gallon, and analysts expect the final price at the pump to increase by an additional 15 cents in the next five to seven days. As of Monday, the average gas price was approximately $3.10 per gallon, according to AAA.

In addition to gasoline, diesel prices rose by 10 cents a gallon. The higher cost of diesel could lead to increased fuel surcharges for trucking companies, which would ultimately drive up the cost of goods. This also means that heating oil prices, which are closely tied to diesel fuel prices, could see an increase as well.

Impact on Oil Imports from Canada and Mexico

Canada is the largest supplier of imported oil and gasoline to the US, but Mexico also plays a significant role. While Canada’s oil is mostly transported via pipeline and is hard to reroute, Mexico’s oil exports are shipped by sea, making it easier for them to be redirected to other markets. If tariffs are implemented on imports from Mexico, the US could face even higher gas and diesel prices, although Mexico’s share of US petroleum exports is smaller than Canada’s.

On Monday, President Trump announced that the tariffs on Mexican imports would be temporarily put on hold for a month following a conversation with Mexican President Claudia Sheinbaum. However, if these tariffs go into effect later, they could still cause an impact on US fuel prices.

Will Tariffs Be Short-Lived?

Many analysts believe that the tariffs could be short-lived. Oil futures saw a modest rise of 2% to 3% on Monday morning, but some investors are betting that the tariffs will not be sustained for long. Nonetheless, consumers can expect a noticeable price increase in the short term.

Andy Lipow of Lipow Oil Associates mentioned, “What you are seeing is a great reshuffling of oil about to begin.” As Canadian and Mexican oil is redirected elsewhere, the resulting supply disruption could push prices higher for US consumers.

Regional Differences in Price Impact

Not all areas of the US will feel the price increases equally. For example, most of Canada’s oil is transported to Midwest refineries via pipeline, so states served by these refineries (including Illinois, Indiana, and Ohio) will likely see the largest price hikes. On the other hand, regions like New England—where gasoline comes from refineries in Saint John, New Brunswick—may see a rise of up to 20 cents per gallon.

The timing of the tariff imposition also plays a role in the level of price impact. Gas prices are typically lower in February due to decreased demand during the winter months. However, if the tariffs remain in place through the summer months, when gasoline consumption is at its peak, the impact could be much greater, fueling inflation and driving up prices for goods and services across the country.

Conclusion: Short-Term Pain, Long-Term Uncertainty

While the tariffs on Canadian imports will bring an immediate price increase at the pump, the full extent of the impact remains uncertain. The good news is that the tariffs on energy products are relatively lower than those on other goods, and the timing of the price hikes could be mitigated by the seasonal drop in demand for fuel. However, if the tariffs remain in place for months, US consumers could feel the strain on their wallets, with potential consequences for overall inflation.

Source

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Key Points:

• Investment banks forecast the Chinese yuan to weaken to an average of 7.51 per dollar by the end of 2025.
• This would mark its lowest level on record, based on data since 2004.
• Chinese authorities face a tough balancing act: stabilizing the yuan while reviving the economy.

The Chinese yuan is under increasing pressure as global investment banks predict the currency will hit record lows due to looming tariff threats from U.S. President-elect Donald Trump.

Weakening Yuan Projections

According to calculations by CNBC, major financial institutions estimate the offshore yuan will average 7.51 per dollar through 2025, signaling the weakest value since record-keeping began in 2004.

Currency Projections by End-2024 and End-2025 (Selected Banks):

Trump announced on Monday via his social media platform Truth Social that he plans to impose an additional 10% tariff on all Chinese imports. This is on top of his campaign promise to implement tariffs of 60% or more.

Economic Impact of Tariffs

Analysts warn that new tariffs would strengthen the U.S. dollar, forcing significant currency adjustments in countries with strong trade ties to the U.S., including China.

Jonas Goltermann, deputy chief markets economist at Capital Economics, explained, “U.S. tariffs would, all else being equal, lead to an appreciation of the dollar.”

Mitul Kotecha, Barclays’ head of FX & EM macro strategy for Asia, projected the yuan could devalue to 8.42 against the dollar to fully account for 60% tariffs.

Recent Yuan Performance

The offshore yuan has already depreciated by more than 2% since the U.S. presidential election on November 5, trading at 7.2514 as of Thursday. The heightened uncertainty around this tariff threat is greater than during Trump’s first term, given its scope and the scale of the trade imbalance.

China’s Response

To counter the yuan’s slide, the People’s Bank of China (PBOC) has held major policy rates steady, aiming to maintain currency stability. Last week, a central bank official emphasized the goal of keeping the exchange rate “basically stable at an adaptive and balanced level.”

Wei Liang Chang, global FX strategist at DBS Bank, expressed optimism, stating that stabilizing measures could manage depreciation expectations and bolster broader Asian currencies. He added, “A recovery is on the cards when U.S. rates soften further.”

U.S. Policy and Market Reaction

The U.S. dollar index has eased slightly after Trump nominated hedge fund manager Scott Bessent as the next Treasury Secretary. Bessent, who supports tariffs, has advocated for a phased approach, which analysts believe could mitigate trade risks and limit excessive capital outflows from China.

Looking Ahead

As China grapples with economic recovery and currency stabilization, the U.S. tariff threat adds significant challenges to the global trade environment. The yuan’s trajectory remains uncertain, hinging on policy decisions and ongoing U.S.-China negotiations.

Source

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