Inflation may prevent the Fed from fending off a recession

Subscribe to enjoy similar stories. A new fear is gripping Wall Street: The economy may go into reverse while tariffs keep consumer prices too hot. Concerns over “stagflation"–a destructive combination of poor growth and rising prices that befuddle policymakers’ attempts to intervene–are dropping the floor from under stocks and sending investors to the safety of U.S.

government debt, pushing down Treasury yields. Investors worry that President Trump’s antitrade measures would keep the 12-month pace of price increases above the Federal Reserve’s 2% target while curbing economic growth. With inflation above target, the Fed would be reluctant to lower borrowing costs to jump-start the economy.

Inflation and recession would coexist. Guneet Dhingra, head of U.S. rates strategy at BNP Paribas, said stagflation risk is “one of the core themes in the market" these days.

He said many of his clients believe the Fed will step in and save the day by cutting interest rates if growth stalls. “Those same investors don’t consider the fact that the Fed also has a dual mandate and has an inflation target to defend." The rapid flow of policy changes is stoking anxiety around headline economic data, much of which still dates from January and doesn’t capture the impact of tariffs. Recently updated indicators have pointed to sticky inflation mixed with weakening activity.

Stagflation fears eased a little Wednesday after February’s annual consumer price index cooled to 2.8% from 3%, giving the Fed some room to focus on the other part of its dual mandate and ensure jobs are plentiful. The full impact of tariffs on consumer prices is yet to be felt, though, and other indicators point to a slowing economy. The number of U.S.