Fed Chair Powell Smacks Down Stagflation Talk

Federal Reserve Chair Jerome Powell decisively smacked down the growing discussion that the U.S. may be entering a period of stagflation. The unusual give-and-take occurred during a press conference following the Federal Open Market Committee (FOMC) decision. Powell’s responses at these briefings are notoriously hedged, leaving room for several possible outcomes.

However, this wasn’t the case when asked by Financial Times reporter Claire Jones if he thought stagflation is a risk to the economy. The term stagflation is used to describe a stalling economy with high inflation and often refers to the economic conditions of the 1970s. Powell responded by acknowledging stubborn inflation but then launched into a data-rich, point-by-point explanation as to why it is ridiculous to describe the U.S. economy as even slightly resembling stagflation.

Powell said the current economic landscape differs significantly from the stagflationary period of the 1970s, which he added he lived through.

Powell’s Reasoning

Powell pointed to several key data points to support his confident response. He explained to the audience of reporters that, unlike the 1970s with high unemployment and oil price shocks, today’s economy boasts a strong labor market and inflation-adjusted energy costs similar to historical norms. He challenged anyone to compare 4% inflation to 10% inflation.

Powell further strengthened his case by explaining that wage growth, though not exceeding inflation, has kept pace. He explained further that this differentiated the current situation from the 1970s.

The Fed Chair then drew laughs when he ended by declaring, “Frankly, I don’t see the stag or the flation.”

Stagflation 101

Stagflation is an economic term that should be understood by anyone who uses it. For the Federal Reserve, it is a dreaded economic scenario characterized by three difficult economic, and seemingly opposite, elements occurring all at once:

• High Unemployment: A large portion of the workforce is unable to find jobs.  
• Slow Economic Growth: The overall economy is either recessionary or expanding at a sluggish pace.  
• High Inflation: Prices of goods and services rise rapidly, eroding purchasing power. 

Historically, stagflation has proven difficult to combat because policy tools designed to address one issue can worsen another. For instance, monetary policy tools to stimulate economic growth can exacerbate inflation, while actions to curb inflation can lead to higher unemployment.

Key Takeaway

Fed policymakers can be uncharacteristically certain on some topics. For Powell, one of these topics is whether we are on the road to stagflation – he doesn’t waver an inch. The Fed Chair currently sees no threat of stagflation as all three measures of the economic condition are at bay.