By Nick Timiraos
Two years ago, with the economy chugging along and inflation falling, Federal Reserve Chair Jerome Powell dispatched a question about stagflation with humor rather than scorn. "I don't see the 'stag' or the 'flation,' actually," he deadpanned.
The term -- for an economy stuck with both weak growth and high inflation -- resurfaced last year when tariffs threatened to lift prices and crimp hiring. But it was still mostly theoretical, a policy choice that could be reversed.
Now, an energy shock from an actual war has again revived the risk, hitting an economy where inflation never fully returned to the Fed's 2% goal. The stagflation parallel of the 1970s isn't as far-fetched as it was two years ago.
Fed officials are almost certain to hold their benchmark interest rate steady in a range of 3.5% to 3.75% at their two-day meeting that concludes Wednesday. But the meeting, Powell's last before his term as chair ends next month, marks a waypoint in the following debate: How much longer can the committee defend its recent posture that its next move is more likely to be down than up?
Officials are watching how the U.S. economy digests its fourth supply shock in five years -- the pandemic reopening, Russia's invasion of Ukraine, tariffs and now the Middle East. Each could be treated as a one-off that doesn't call for a policy response. The cumulative effect has officials on edge. Tariffs have already been testing businesses' and consumers' willingness to pay higher prices.
Policymakers are puzzling over whether weak job growth overstates labor-market fragility. If the economy isn't adding as many workers as it used to, due to an immigration slowdown, it doesn't need as many jobs.
Fed governor Christopher Waller, whose worries about the labor market underpinned last year's three rate cuts, shifted toward inflation vigilance this month. He reached back to the 1970s, when a series of shocks that officials dismissed as transitory allowed inflation expectations to drift.
"We have to be careful with these sequence of one-off shocks," Waller said. "Expectations matter, and at some point you may have to respond."
Despite a cease-fire in the Iran war, the Strait of Hormuz remains effectively closed. Jet fuel prices have surged. Fed officials now expect another year of no progress returning inflation to 2%.
"We keep saying two, we're five years in, and it has never gotten back to two. At what point do people start doubting your promises?" Waller said.
Some officials had until recently talked about resuming cuts this year to offset an automatic tightening that happens when inflation falls while rates stay the same. No longer. "Right now, that's not the situation we're in," New York Fed President John Williams told reporters on April 16. "If anything, [inflation] is moving up."
The U.S. economy has changed since the 1970s in ways that make a full repeat unlikely. And the Fed pays much more attention to inflation expectations than it did then.
Williams framed the Fed's current stance as a deliberate choice, not a default. "We positively are in the right place for monetary policy," said Williams. "This is where we want to be."
The bigger question for committee members is whether they should change their formal statement to imply rate cuts are off the table. Changes to this language have historically mattered at least as much as rate decisions.
A nine-word phrase that suggests the next policy move is more likely to be a cut than a hike has been sitting there since late last year. A minority of officials wanted to get rid of the language at the Fed's last two meetings. Removing it would imply a rate cut and a rate increase are equally likely.
Their case: Inflation has been moving the wrong way, and projecting a return to 2% is harder the longer that shocks pile up. The labor market has held up, and stock prices have rebounded to records. None of that fits a committee advertising that cuts are still on the horizon.
The prevailing view on the committee, though, has been that this change would go too far. A formal shift in the language would itself tighten financial conditions -- the kind of hawkish move officials may not be ready to make. "It doesn't make sense for us to try to be giving strong forward guidance, and we're not," said Williams, a key Powell ally.
Officials will take up the question again this week.
The committee's thinking sometimes moves faster than its language. Before hitting the gong of a change in their policy statement, officials have other, more subtle ways to telegraph where they are heading -- in Powell's press conference on Wednesday, officials' speeches in May or the projections they will release at their subsequent meeting in mid-June.
By then, the committee is likely to be led by Kevin Warsh, the former Fed governor whom Trump nominated to succeed Powell. The process of deciding whether and how to formalize a shift in the Fed's guidance could fall to Warsh, who might see the question differently.
Write to Nick Timiraos at Nick.Timiraos@wsj.com
(END) Dow Jones Newswires
April 28, 2026 05:30 ET (09:30 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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