Moody's warns: Trump's tariffs and immigration policies may cause the US to fall into "stagflation", and the Fed will be forced to raise interest rates

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• Moody's Chief Economist: Trump's Policies May Lead the US into "Stagflation"
• US Economic Activity Slows, Stagflation Concerns Intensify
• Will the Fed Raise Rates in Response?

As the Fed's fight against inflation has stalled, market panic over the slowdown in economic activity, and Trump's tough tariff policy threatening a rebound in inflation, have all led to growing concerns that the US may be heading into "Stagflation" recently, and several economists have also warned of the related risks. Stagflation (also known as stagnation and inflation) in economics refers to the economic phenomenon of stagnation with rising unemployment and inflation (persistent price increases) occurring simultaneously. Moody's Chief Economist: Trump's Policies May Lead the US into "Stagflation" According to a CNBC report, the dual threat of rising prices and slowing economic growth has caused anxiety among consumers, business leaders and policymakers, not to mention investors who have been frantically selling stocks and buying TREASURY bonds. Regarding the recent market panic, Mark Zandi, chief economist at Moody's, one of the three major US credit rating agencies, said in an interview: "From the direction, this is stagflation, rising inflation and slowing economic growth is the result of (Trump's) tariff policy and immigration policy." If true, this would be the first time the US has fallen into stagflation since the 1970s (50 years). Zandi also warned Reuters last week that the market may be underestimating the risk of stagflation. In addition to tariffs, he pointed out that Trump's policy of deporting undocumented immigrants will also exacerbate inflation. "Tariffs and deportation of immigrants are the root causes of inflation, which will harm economic growth; both are negative supply shocks. Negative supply shocks such as soaring oil prices led to stagflation in the 1970s." US Economic Activity Slows, Stagflation Concerns Intensify Notably, the market's concerns about stagflation have been reflected in multiple soft data. A survey of global fund managers by Bank of America last week showed that the proportion of investors expecting stagflation in the next year has reached the highest level in 7 months. Consumer expectations of long-term inflation are at their highest level in nearly 30 years, while overall sentiment is at a multi-year low. According to the Personal Consumption Expenditures (PCE) report released by the US Department of Commerce last Friday, despite a significant increase in income, consumer spending saw its biggest decline in nearly four years in January. On Monday, the Institute for Supply Management (ISM) Manufacturing Purchasing Managers' Index (PMI) showed that the decline in new orders in February was the largest in nearly 5 years, while the monthly price increase was the highest in over a year. After the PMI indicator was released, on the 3rd, the GDPNow indicator of the Atlanta Fed revised down its forecast for US real GDP growth in the first quarter to an annualized rate of -2.8%. If this figure continues, it will mark the first negative growth since Q1 2022. Will the Fed Raise Rates in Response? If the US really falls into stagflation, how will the Fed respond? Moody's Mark Zandi warned that the Fed may still raise interest rates to curb inflation, just as former Fed Chairman Volcker did in the early 1980s, which resulted in the economy falling into recession. "If there is true slow growth stagflation, they will sacrifice the economy." Stifel's chief equity strategist Barry Bannister, however, predicts that the Fed may not further cut rates this year, as he believes the US economy could fall into stagflation in the worst-case scenario in the second half of the year, leading to a 10% drop in the SP500 index by the end of the year. However, there are also different views. James Bullard, former president of the Federal Reserve Bank of St. Louis, analyzed last week that stagflation is the least desirable scenario for the Fed, and although facing this difficult choice, he believes the central bank may ultimately decide to cut rates, "I think they may cut rates because they think the economic slowdown will naturally cause inflation to decline slightly." In fact, the Fed Watch tool on the Chicago Mercantile Exchange shows that the market currently expects the Fed to start cutting rates in June, and may lower the policy rate by 3 notches (75 basis points) this year, 1 notch higher than the earlier expectation of 2 notches, betting that the Fed will increase the pace of rate cuts this year to avoid a continued economic slowdown.