The US can’t escape a looming wave of inflation, and the government looks ill-prepared to respond, says Adam Posen, president of the Peterson Institute for International Economics
In a speech earlier this week, Posen said these inflationary expectations are fueling his forecast that the US economy has a 65% chance of falling into recession. And even worse, according to Posen, the situation could feature both persistent inflation and sluggish growth, the exact ingredients for stagflation.
That scenario would put the Federal Reserve in a difficult spot, effectively unable to raise or lower interest rates.
Adding to the issue, Posen says, is his view that the Fed has been “too loose” with monetary policy, which is contributing to inflation risk.
President Donald Trump’s sweeping duties have made this conversation all the more relevant, as economists warn that disrupted trade will boost product pricing.
Some have argued that these fears are overblown, expecting companies, not consumers, to likely take the hit. But Posen warned that there’s not much to stop firms from marking up their price if corporate concentration is allowed under Trump’s deregulatory environment.
“If we get inflation, the Fed will be behind the curve,” he added, implying that accelerated price growth would require higher rates.
On the growth side of things, policymakers might hope that Trump’s fiscal policy will keep the economy running.
That’s a bad bet, Posen warned.
In his view, there’s a 5% to 10% chance the US could achieve 1% GDP growth, that would only result from an “irresponsible fiscal stimulus” package, going beyond promised tax reductions and spending cuts to programs such as Medicaid.
More realistically, “you’re not going to get a big consumer bounce. You’re not going to get a corporate investment bounce, in fact, you’re more likely to see a cutback.”