Jamie Dimon, chief executive officer of JPMorgan Chase, the largest financial institution in the structure of the United States banking sector, has repeatedly made some kind of warning statements over the past year that the US economy faces a high level of risk that a negative stagflation scenario will be implemented in its space, repeating the experience of the 1970s, but other experts with the appropriate vision of potential prospects disagreed, which, however, does not mean, that for Washington, moving forward along the symbolic road of all-powerful time is no longer associated with any potential dangers and pessimistic situations.
In the context of any perspectives, including economic ones, it is worth remembering that the list of probabilities can be very large-scale, but it is unlikely that all possible versions of the further dynamic of the process or phenomenon will be exclusively positive. Threats also tend to lose and regain their relevance. The potential scenario that Jamie Dimon, who has a kind of unofficial reputation as the president of Wall Street, warned about, provides for a state of affairs consisting of components such as rising inflation and a slowdown in the intensity of the movement of gross domestic product (GDP) along an upward trajectory.
During a speech at a conference in May, the head of JPMorgan Chase described as extraordinary the amount of financial and monetary incentives that have taken place in the United States over the past five years. Also at that time, he noted that appropriate measures could provoke the implementation of a stagflation scenario in the space of the US economic system.
However, Jamie Dimon’s predictions have been refuted by other experts. Jerome Powell, Chairman of the Federal Reserve System, was one of those who disagreed with the corresponding vision of the prospects for the United States economy. At a conference in May, the head of the US central bank said that he did not see the stag or the flation.
All mentioned statements and forecasts regarding the economic prospects were made before Donald Trump won the November United States presidential election. Currently, as some media and experts note, the implementation of the stagflation scenario is realistic for the US, and not a theoretical probability, which has nothing to do with the actual order of things. In this case, the risk factor is Donald Trump’s repeatedly declared intentions to increase tariffs on goods imported into the United States from other countries. After winning the election, he confirmed the mentioned plans. In this context, intentions were noted to impose 10% tariffs on products shipped from China and 25% tariffs on goods imported from Canada and Mexico. The implementation of the relevant plans significantly increases the risk of realizing a stagflation scenario, which the United States has not faced as an actual configuration of economic reality for more than half a century.
As for tariffs on goods imported from China, Mexico, and Canada, Donald Trump intends to impose these measures immediately after his inauguration, scheduled for January 20. The implementation of the relevant intentions will have sensitive consequences for the economies of the mentioned countries. In this context, it is worth noting that China’s economic system is currently heavily dependent on export activity, which is the main driving force behind its upward dynamic.
During the election campaign, Donald Trump also promised to levy a tax of 10% to 20% on all imports. Moreover, it was noted the intention to increase tariffs on products shipped from China by at least 60%. After the election, Mr. Trump has not yet mentioned the said scope of Washington’s tariff policy towards Beijing. It is worth noting that this does not mean abandoning the relevant plans. Perhaps the 10% tariffs on goods imported from China mentioned by Donald Trump after his election victory are the first stage of tightening trade measures against the Asian country. At the same time, this is just an assumption, the implementation of which is strictly a theoretical probability and cannot be guaranteed.
Some experts demonstrate doubts that Donald Trump, after the inauguration, will implement all his publicly declared intentions regarding tightening Washington’s tariff policy on imported products. According to supporters of such points of view, Mr. Trump may use the so-called tariff threat as a means to negotiate with other countries. At the same time, the probability that the maximum tightening of tariff policy will become a fact of objective reality is far from minimal. The implementation of the corresponding scenario will mean a significant increase in tension in the global trade space. Also, in this case, risks will be formed for the economic system of the United States. If stagflation is the negative consequence of tightening tariff policy for the US, then Washington will face dire straits, which may take more than ten years to overcome, as evidenced by a similar experience in the 1970s. This does not mean a kind of zeroization of the United States economy, but it provides for very sensitive problems that will be noticeable to everyone and will not become something that residents of the country will be able to ignore.
In 1970, the unemployment rate in the US reached 6%. At the same time, until the mid-1960s, the corresponding figure did not exceed 2.5%. Inflation in the United States in 1970 was fixed at 5.5%. Until the mid-1960s, this figure did not exceed 1.5%. In the mid-1970s, inflation in the United States rose to over 10%. The unemployment rate in the US had reached 7.6% by that time.
At the level of theoretical comprehension of stagflation, economists name two main reasons for the corresponding state of affairs. One of the scenarios for the formation of this situation is a decrease in production volumes due to changes in raw material prices, which are critically important for a particular economic system. Also, stagflation may become a reality as part of a simultaneous slowdown in the upward dynamic of the manufacturing sector and an acceleration of inflation because of government policy. It is worth clarifying that economic policy is meant in this case.
In May, Jerome Powell noted that he was around for stagflation. In this context, the Fed’s head meant a sharp increase in oil prices during the Arab embargo on the corresponding mineral in the 1970s. Speaking about the specified period, Jerome Powell mentioned high unemployment, high single-digit inflation, and very slow economic growth.
In the 1970s, the central bank of the United States cut interest rates in response to the deteriorating employment situation. In this case, the purpose of the US financial regulator was to relieve the pressure faced by businesses. Then the Fed began to fight high inflation. To overcome the problem of intense price increases, the central bank of the United States began to raise interest rates. Against this background, the unemployment rate has grown. As a result, Washington faced a situation that can be described as a vicious cycle. The Fed has decided to make it a priority to decline inflation by implementing a monetary policy strategy that implies an aggressive increase in interest rates. The US financial regulator did not abandon this intention even against the background of the risk of recession, which eventually materialized in the space of economic reality.
It is worth noting that the current condition of the United States economic system is more favorable compared to the situation that the Fed faced throughout most of the 1970s and 1980s. Over the course of 2024, the unemployment rate in the US rose to 4.2%, but still, this figure is 2 percentage points below the average reading over the past 50 years.
The Fed has also made significant progress in combating inflation. In November, the corresponding figure was fixed at 2.7%. In June 2022, inflation in the United States was 9.1%. The target of the US financial regulator is 2%. Inflation is still higher than the mentioned indicator, but progress in movement towards the goal in this case is obvious. The Fed’s fighting against increasing prices over the past two years has been difficult, however not in vain, since a positive result is an objective fact in this case. As part of the mentioned process, the central bank of the United States raised interest rates to the highest level in two decades. In the second half of the current year, the US financial regulator began lowering the cost of borrowing. It is expected that at the December meeting, which will be held this week, the Fed will make another decision on cutting interest rates. At the same time, according to some experts, the effect of appropriate actions will be fully realized over time.
In the third quarter of the current year, the United States economy showed growth of 2.8% year-on-year. This dynamic is weaker compared to the degree of intensity of movement of the mentioned indicator along an upward trajectory, which was observed in the previous quarter but nevertheless is strong.
Michael Feroli, chief US economist at JPMorgan Chase, said that Donald Trump’s tariffs are not inherently inflationary. At the same time, appropriate measures can make many goods that residents of the United States buy more expensive. It is possible that the price rise will affect most products. According to Michael Feroli, in this case, there may be a one-time bump in the prices, similar to the situation traditionally observed with an increase in a sales tax. At the same time, the expert warned that the higher cost of goods could trigger a cascading price growth if residents of the United States expect inflation to accelerate in this case and demand higher wages for the corresponding reason. On the mentioned background, businesses can continue to raise prices. Obviously, in this case, residents of the United States will face sensitive economic consequences at the level of personal financial condition.
Michael Feroli also warned about the negative consequences of potentially possible haphazard and hasty imposing new tariffs. According to the expert, the implementation of the corresponding scenario will mean that businesses will not have enough time to reconfigure their supply chains, which could provoke a slowdown in economic growth. It was also noted that in this case, the rejection of any new investments may be recorded against the background of a high level of uncertainty.
Michael Feroli estimates the probability of stagflation in the space of the economic system of the United States as realistic. According to the expert, the corresponding situation will form if other countries decide on retaliatory tariffs for goods produced in the United States. It was also separately noted that within the framework of such a state of affairs, employers may begin to lay off workers.
Michael Feroli stated that the risk of a stagflation scenario in the United States is currently higher than at the beginning of 2024. At the same time, the expert noted that this is not the base case that he and the team of economists he works with predict at the moment. They do not expect inflation to jump by more than a few tenths of a percentage point compared to the current indicator. According to Michael Feroli, the administration of Donald Trump will give US companies enough time to respond to tariff increases if appropriate measures are imposed.
Wells Fargo economists agree with the opinion of the mentioned expert. According to them, if the intentions to increase tariffs on imported goods are realized shortly after the inauguration of Donald Trump, it will provoke a moderate stagflationary shock in the space of the economic system of the United States. Wells Fargo experts also boost their forecasts for inflation in the near term. At the same time, they dampened the economic growth outlook. Moreover, Wells Fargo experts noted significant uncertainty regarding the policies of the Donald Trump administration.
It is worth noting that to a certain extent, the tightening of Washington’s tariff policy corresponds to what can be called the logic of the current increase in tension in the space of geopolitical relations. Nowadays, the relationship between many world capitals is gradually deteriorating. The corresponding state of affairs is relevant, including in the context of the condition of cooperation between Beijing and Washington. Against this background, the increased tension in global trade is, in a certain sense, a natural continuation of the negative geopolitical situation. It is worth noting that geopolitical tensions are currently on an escalatory trajectory and show no signs of easing in the foreseeable future.
