The Base Case for Trump’s Economy Is Stagflation

Today’s Federal Reserve meeting was a bit of a nothingburger, as the Fed Funds Rate remained unchanged and Jerome Powell did his usual song and dance of sticking the bad news in the committee’s statement (“uncertainty about the economic outlook has increased further”), then being the US economy’s hype man during the press conference. But there was one thing he said that was a bit eye-opening in its brutal honesty.

Powell: If announced tariffs remain in place, the likely outcome will be “a rise in inflation, a slowdown in economic growth and a rise in unemployment.”

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— Ben Casselman (@bencasselman.bsky.social) May 7, 2025 at 12:37 PM

This is a description of stagflation, the worst thing that can happen to an economy which was once thought to be impossible until the 1970s proved otherwise. It’s what high-level traders were betting on last year after Joe Biden’s calamitous debate, and it is what the bond market has been preparing for since September when everyone realized that Trump could win. That markets didn’t really budge during or after a press conference that typically moves them around is instructive as to how they are viewing the current state of things: nobody knows anything about the future of Trump’s trade policy.

Right before the Fed press conference, Trump said that he was not thinking of removing the tariffs on China that Treasury Secretary Scott Bessent repeatedly refers to as an embargo, including yesterday when Bessent told Fox News that they were discussing a way to lower tariffs on China and reach a more acceptable status quo. Whoopsies! The markets did not react to any of this really as they have been very flat-ish lately, which is a bad sign for a Treasury Secretary trying to talk everyone into manifesting Joe Biden’s bull market again.

These are the kinds of diminishing returns I talked about last time Trump blinked and the market moved less than it did the time before when Trump blinked. Trump blinked a bit again today on his AI chips restrictions after Nvidia and other tech giants began making immense amounts of noise, but as always with an administration running economic policy on a whim, the devil will be in the details on what this exemption truly looks like.

This is headed nowhere good. Trump’s supply shock is here as America’s ports are losing catastrophic amounts of business, and this will spill over into a litany of industries in the coming months. Supply shortages are practically guaranteed by the fourth quarter of this year at this rate, and the historic net exports figure that led to negative first quarter GDP demonstrates that companies have stocked up on inventory, but the Port of Los Angeles Executive Director said that “normal inventory” should only last “5 to 7 weeks.”

The market’s increasingly muted responses as it has floated up since liberation day seems to indicate it still doesn’t quite understand how Trump has thought about this issue for over 40 years. It’s natural to assume that Trump believes in nothing, but there is one thing he has always believed in: personally enriching himself at the expense of everyone else. He clearly views tariffs as a form of patronage other countries must pay, and his shitcoin and stablecoin are both specifically designed to facilitate bribes. It’s pretty obvious what Trump’s ideal world looks like, and it’s also becoming clear where Jerome Powell and the Federal Reserve see he wants to take us. The stock market is way behind both of them, and this disconnect is creating the kind of dynamic that allows for severe downside surprises that can lead to an economic calamity.