Federal Reserve Warns Against Stagflation. What Is It and Who Is at Risk?

The Federal Reserve opted to leave interest rates unchanged on Wednesday, citing heightened risks of rising inflation and slowing growth, which have prompted renewed warnings about stagflation.

The decision came at the close of the Federal Open Market Committee’s meeting. Policymakers held the federal funds rate steady at a target range of 4.25 percent to 4.5 percent, where it has remained since December 2024.

The Fed’s latest statement acknowledged increasing uncertainty.

“Uncertainty about the economic outlook has increased further,” the FOMC statement said. “The Committee is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen.”

What To Know

This is the third consecutive meeting at which the Fed has held rates steady. It comes amid a trade war between the U.S. and China, in part after President Donald Trump implemented new, additional 145 percent tariffs on Chinese goods.

Further, Trump’s trade policies have created some opposing pressures, complicating the Fed’s moves.

While the FOMC statement did not reference tariffs, Federal Reserve Chairman Jerome Powell, speaking after the decision, said that given the scope of the tariffs, there will be risks of higher inflation and unemployment.

Regardless, Powell said he believes the Fed is prepared for how the tariff situation will play out, CNBC reported.

“There’s just so much that we don’t know, I think, and we’re in a good position to wait and see, is the thing. We don’t have to be in a hurry. The economy has been resilient. It’s doing fairly well. Our policy is well-positioned,” Powell said.

The decision to keep the federal funds rate steady was unanimous. The rate influences borrowing costs across the economy, including mortgages, credit cards, and business loans.

What Is Stagflation?

“Stagflation” is an uncommon but severe economic condition marked by stagnant growth, high inflation, and high unemployment, according to Fidelity Investments. The term merges “stagnation” and “inflation” and describes a scenario where prices rise even as the economy stalls or contracts.

According to Fidelity, stagflation’s last major appearance in the U.S. came in the 1970s and early 1980s, driven in part by the oil embargo. In such conditions, the typical policy tools used to cool inflation, such as raising interest rates, can also worsen unemployment and sometimes suppress growth.

Who Is at Risk of Stagflation?

The implications of stagflation are broad, hitting both consumers and businesses. For households, purchasing power diminishes as prices outpace wage growth.

“Unless you’re receiving regular raises to counteract inflation, your take-home pay may not be able to cover as much,” Fidelity explained. “If unemployment is high, employers aren’t likely to lift wages to compete for easy-to-find talent.”

For investors, stagnation can drag on stock markets, as economic output slows and earnings decline. Meanwhile, fixed-income investments could be eroded by persistent inflation unless adjusted accordingly.

Businesses, particularly those reliant on imported materials or operating in industries with tight profit margins, may also suffer.

Earlier today, Trump doubled down on his position on China tariffs, saying he will not modify tariffs to initiate negotiations with the country.

As global markets respond to mixed economic signals, the next few months may prove critical in determining whether the U.S. economy can avoid a repeat of stagflation.

05/07/25, 4:05 p.m. ET: This article has been updated with additional information.