Is the Fed undermining stagflation risks? The 1970s paved the way for many firsts – first handheld calculator, the birth of the first test-tube baby, the first personal computer. Most importantly, it was also known for a period of high inflation accompanied by stagnating economic growth. By 1979, this episode found a new name called ‘stagflation’* The FOMC, in its March policy meeting held the Fed fund rate at 4.25-4.5% as widely anticipated and maintained a wait and watch approach with an increased risks around economic outlook. The dot-plot was maintained in the March policy meeting – indicating two rate cuts this year. Importantly, the projection for PCE inflation was revised upwards to 2.7% in 2025 from 2.5% earlier, and 2.2% in 2027 from 2.1% before. The core inflation projection was also revised upwards to 2.8% for this year from 2.5% earlier. In addition to this, the real GDP is now seen at 1.7% this year from 2.1% before, and 1.8% from 2% earlier. The toxic combination of high inflation and stagnant economy or weak economic activity is often referred to as stagflation. The committee also revised unemployment rate higher to 4.4% this year from 4.3% earlier.
