Several traits associated with stagflation are beginning to come together, potentially complicating life for Fed Chair Kevin Warsh and the FOMC. Trailing 12-month inflation has been above the Fed's 2% target for 65 months, and evidence suggests Trumpflation is becoming entrenched. The July jobs report showed 23,000 job losses and wage growth of 3.2%, lagging inflation, while annualized GDP growth fell to 1.5% in the second quarter. The unemployment rate fell to 4.1% in July, but a declining labor participation rate masked weakening job creation. If the job market or wage growth materially worsens, Warsh and his colleagues may be forced to act, potentially pressuring a historically pricey stock market.
Stagflation signals may force Fed to act, potentially raising rates or tightening policy, which would increase the effective federal funds rate.
Stagflation concerns could lead to higher long-term yields as inflation expectations rise and Fed may tighten policy.
