New York
CNN
 — 

Jamie Dimon, head of America’s largest bank, JPMorgan Chase — and commonly referred to as the ‘president of Wall Street’ — spent much of this past year warning that there’s an elevated risk that the US experiences 1970s-esque stagflation, which is when economic growth stagnates while inflation heats up.

“I look at the amount of fiscal and monetary stimulus that has taken place over the last five years — it has been so extraordinary; how can you tell me it won’t lead to stagflation?” Dimon said at a conference in May.

His prediction, however, has been pooh-poohed by many leading economic voices; chief among them was Federal Reserve Chair Jerome Powell, who said at a press conference in May, “I don’t see the stag or the ‘flation.”

That, of course, was before President-elect Donald Trump won the election. Now, Americans may have to actually brace for stagflation — something the nation’s economy hasn’t experienced in over half a century. This time around, though, fueled by tariffs.

Just over a month from now, Trump will have the power to levy tariffs on other nations at the flick of a pen. And once inaugurated on January 20, he has pledged to immediately impose a 25% tariff on Mexican and Canadian imports and increase tariffs on Chinese goods by an additional 10%.

On the campaign trail, he also promised to levy a 10% to 20% tax on all imports and increase tariffs on Chinese goods by at least 60%.

There are some doubts as to whether Trump will follow through with these plans and, instead, use them as a means to negotiate with other nations. However, if these significant, broad-based tariffs go into effect, it could send the US economy back to one of the most painful periods that took over a decade to resolve.

“I was around for stagflation. It was 10% unemployment. It was high single-digits inflation and very slow growth,” Powell said back in May, referring to when oil prices spiked during the Arab oil embargo in the 1970s.

When the Fed responded to high levels of unemployment in the 1970s by cutting rates to relieve pressure businesses faced, it later had to contend with higher inflation. To tackle higher inflation, central bankers raised interest rates. But that ushered in more unemployment.

To break that vicious cycle, the Fed opted to prioritize getting inflation down by aggressively raising interest rates, even if it meant the economy would enter a recession, which it did.

The US economy currently isn’t anywhere near the conditions the Fed faced during much of the 1970s and 1980s. Though it’s risen over the course of this year, at 4.2%, the nation’s unemployment rate is two percentage points lower than the average seen over the last 50 years.

Meanwhile, inflation has cooled significantly over the past two years. It’s now just a touch above the Fed’s 2% target. Getting it down to that exact level has proved to be challenging.

Overall, the economy grew at an annualized rate of 2.8% last quarter, a slightly weaker pace than the prior quarter, but nevertheless impressive considering the Fed raised interest rates to the highest level in over two decades to fight inflation, which peaked at a 40-year high two years ago. (The Fed started lowering rates earlier this year and is expected to continue to cut at its meeting this week. However, it can take years for the effect to be felt across the economy.)

The tariffs Trump has floated aren’t inherently inflationary, Michael Feroli, chief US economist at JPMorgan, told CNN.

While they certainly have the power to make many, if not the majority, of goods Americans buy more expensive, that could just be essentially a one-time bump in the prices of goods, similar to a sales tax increase, he said. But higher tariffs can quickly fuel cascades of price increases if Americans expect higher inflation because of them and demand higher wages, which, in turn, could result in businesses continuing to raise prices.

And if new tariffs are imposed in a “haphazard” and “hasty” way such that businesses don’t have ample time to reconfigure their supply chains, it could significantly hamper economic growth by also forcing businesses to pull back on any new investments due to heightened uncertainty, Feroli said.

Stagflation could also materialize if other nations were to respond with retaliatory tariffs on US-produced goods, likely leading employers to lay off workers as a result, he said.

Though Feroli believes the risk that the US economy experiences stagflation is higher now compared to earlier in the year, it’s not the base case he and the team of economists he works with are predicting at the moment. That’s because they aren’t forecasting inflation jumping by more than a few tenths of a percentage point from current levels, partly because he believes the Trump administration will give US businesses sufficient time to respond to higher tariffs if they’re set in motion.

Wells Fargo economists share a similar view to Feroli.

“These tariff increases, if implemented shortly after Inauguration Day, would impart a modest stagflationary shock to the U.S. economy, boosting our inflation forecasts in the near term, but also dampening our economic growth outlook,” they said in a note last month, published shortly after Election Day. “Should this occur, the probability of a stagflation scenario in our growth model would likely increase.”

“That said, there is tremendous uncertainty about future potential policies,” they cautioned.

BANGKOK (AP) — Chinese leaders met this week to plot economic policy for the coming year, sketching out plans to raise government spending and relax Beijing’s monetary policy to encourage more investment and consumer spending.

Leaders of the ruling Communist Party wrapped up their two-day Central Economic Work Conference on Thursday with praise for President Xi Jinping’s guidance and a pledge to “enrich and refine the policy toolbox” and defuse risks facing the world’s second-largest economy. One of the biggest: threats by President-elect Donald Trump to sharply raise tariffs on imports from China once he takes office.

Here’s a look at the priorities outlined in this week’s meetings in Beijing and their potential implications.

A focus on fundamentals

Analysts said the broad-brush plans from the annual Central Economic Work Conference and an earlier meeting of the 24-member Politburo were more of a recap of current policy than any ambitious new initiatives.

China’s economy has been growing slightly more slowly than the “about 5%” target leaders set for this year as a prolonged crisis in its real estate sector has weighed on business activity. Weaker housing prices and job losses during the COVID-19 pandemic have left many Chinese unable or unwilling to spend as much as they may have in the past. That has meant supplies of many goods outstrip demand, causing prices to fall or at least remain flat.

The government began rolling out a range of initiatives earlier this year that included paying subsidies when people turn in old appliances and vehicles to buy new ones, expanding access to affordable housing and cutting interest rates to make mortgages more affordable.

According to a readout by the official Xinhua News Agency, the leaders agreed this week to put “greater emphasis on ensuring and improving the people’s well-being and giving people a growing sense of fulfilment, happiness and security.”

That includes policies to stop people from relapsing into poverty, providing a stronger healthcare system and expanding care for older people, it said. It could also include subsidies to families to encourage them to have more children, now that the population is declining.

Who pays, and how?

The leaders committed to raising China’s deficit, which has been long capped at 3% of its GDP, and to doing more to encourage consumer spending by bringing wage increases in line with the pace of economic growth. The government will issue more special ultra-long-term bonds to do that, state media said without giving any dollar amounts.

At the national level, China can afford to do that. Its national debt-to-GDP level is about 68%, compared with Japan’s 250% and 120% in the United States. At the local level, huge amounts of debt remain a problem, with many Chinese workers going under- or unpaid. City and regional governments are deeply in debt after their tax revenues fell due to the property crisis and the pandemic, while spending continued to rise.

Details of any increased spending may emerge later, possibly during the national legislative session in March, analysts said.

Easier credit for investment and housing purchases

Earlier this week, the Politburo endorsed plans to pursue “moderately loose” monetary policies, rather than the “prudent” stance that had prevailed for the past decade.

The last time China adopted that approach was in 2008-2010, when the central bank eased credit aggressively as an antidote to the shocks of the global financial crisis, noted Tao Wang of UBS.

Earlier this year, the People’s Bank of China began cutting interest rates and the required reserves banks must keep on deposit, and is expected to cut rates further in coming months, Wang said.

Cheaper credit would make it easier to finance purchases of housing and other investments as the central bank plays a growing role in helping keep markets stable and boosting the economy.

Expectations of lower interest rates have caused bond prices to soar. But overall, investors who were hoping for more details of planned policies appeared disappointed with the outcome of the week’s meetings. On Friday, the Shanghai Composite index fell 2%, while Hong Kong’s Hang Seng sank 2.1%.

Overall, a cautious approach as China awaits Trump’s second term

Xi’s longer-term blueprint for building an innovative, high-quality modern economy remains the framework for China’s future course as leaders fine-tune policy details while watching to see what Trump does once he takes office.

As the U.S. and o ther trading partners have imposed ever tighter controls on China’s access to advanced technology, such as the latest computer chips and the tools and materials to make them, Beijing has retaliated with its own targeted measures.

Economists say China’s leaders are holding back on more drastic moves to support the economy, which is growing at a reasonably fast pace despite its chronic weaknesses, as they wait to see what happens.

‘Chinese authorities have been stuck in a more reactionary policy mode, as the uncertainty of U.S. tariff plans makes it difficult for policymakers to make any commitment just yet,” Yeap Jun Rong of IG said in a report. “There may still be room for positive surprises, but much will lie in any upcoming policy specifics.”