CNBC Daily Open: Stagflation on the Fed's mind

CNBC

4 hours ago

At U.S. Federal Reserve Chair Jerome Powell's post-meeting press conference, the topic of tariffs — specifically, their impact on prices — was a recurring one.
"Everyone that I know is forecasting a meaningful increase in inflation in coming months from tariffs because someone has to pay for the tariffs," Powell said. "And some of it will fall on the end consumer."
Granted, recent economic data has been upbeat, suggesting the U.S. economy has been able to — and could still — escape from tariffs mostly unscathed.
In May, a better-than-expected 139,000 jobs were added and the unemployment rate was unchanged at 4.2%. Consumer sentiment in early June was much more optimistic than forecast, according to a University of Michigan survey. And, most crucially, inflation in May — based on the consumer price index — ticked up just 0.1% for the month, lower than estimated.
But that string of positive data might have to thank the slow process by which tariffs move through the economy.
"It takes some time for tariffs to work their way through the chain of distribution to the end consumer. A good example of that would be goods being sold at retailers today may have been imported several months ago before tariffs were imposed. So we're beginning to see some effects, and we do expect to see more of them over the coming months," Powell said.
And even though Fed officials, at present, "don't see signs" of the U.S. economy weakening, Powell acknowledged growth will slow "eventually." In other words, stagflation — the toxic mix of higher prices and slower growth — could be a possibility in the months ahead.
The song "I Got Summer on My Mind" went viral in 2022. "I Got Stagflation on My Mind" could be the Fed's — and market watchers' — earworm this summer.
U.S. central bank holds rates, sees two cutsThe U.S. Federal Reserve on Wednesday kept interest rates in a range between 4.25%-4.5%, where it has been since December. Along with the rate decision, the committee indicated, through its closely watched "dot plot," that two cuts by the end of 2025 are still on the table. Earlier Wednesday, President Donald Trump said the fed funds rate should be at least 2 percentage points lower, and again slammed Chair Jerome Powell, calling him "stupid."
Fed hikes inflation and lowers growth forecastsInflation in the U.S., measured by the personal consumption expenditures price index, will rise beyond 3% in 2025, according to an updated Fed forecast. The central bank had in March expected the PCE to hit 2.8%. The PCE came in at just 2.1% in April. The Fed also sees economic growth slowing to 1.4% this year, down from an earlier estimate of 1.7%. In combination, both forecasts point to early signs of stagflation.
Markets and oil prices were flat in U.S.U.S. stocks hovered around the flatline Wednesday. The S&P 500 slipped 0.03%, the Dow Jones Industrial Average closed 0.1% down, but the Nasdaq Composite inched up 0.13%. Oil prices, likewise, were little changed. Europe's regional Stoxx 600 index lost 0.36%. The FTSE 100, however, ticked up 0.11% as data showed U.K. annual inflation coming in at an expected 3.4% in May.
Trump says he hasn't decided on Iran strikesFor the second time in two days, Trump on Wednesday met his national security team in the White House amid the Israel-Iran conflict. The closed-door gathering took place as Trump insisted he had not yet decided whether to order a U.S. strike on Iran. The same day, U.S. Ambassador to Israel Mike Huckabee said evacuation flights and cruise ship departures were being arranged for American citizens seeking to leave Israel.
[PRO] 'Profound impact' on oil market: JPMorganThe current jump in oil prices because of the simmering conflict in the Middle East might not lead to a long-term price shock, according to historical data analyzed by JPMorgan. A regime change in Iran resulting from U.S. or Israeli military action, however, can have a "profound impact" on the global oil market, the bank said.
These are the sticking points holding up a U.S.-EU trade deal
The U.S. and European Union are running out of time to strike a deal on trade tariffs — and analysts say several key sticking points could make an agreement impossible.
Negotiations have been slow since both the U.S. and EU temporarily cut duties on each other until July 9. If a deal is not agreed by then, full reciprocal import tariffs of 50% on EU goods, and the bloc's wide-spanning countermeasures are set to come into effect.
"We're talking, but I don't feel that they're offering a fair deal yet," Trump told reporters Tuesday, further dashing hopes of an imminent agreement.
So what's holding things up between the two sides, which had a relationship worth 1.68 trillion euros ($1.93 trillion) in 2024?