Is Donald Trump's Tariff and Trade Policy Putting the United States at Risk of a Stagflation Crisis?
In the economic landscape of the United States, there is a paradox unfolding. Despite the looming threat of stagflation due to President Trump's tariff and trade policy, the major stock indexes - the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite - are expected to hit new highs over the long run.
The Federal Reserve has expressed concern about the prospects of stagflation, a situation where inflation rises and economic growth stagnates. This fear is heightened by the impact of President Trump's tariff policy, as evidenced by the June inflation report and the significant downward revisions to previously reported job gains for May and June in July 2025. The unemployment rate as of July 2025 remains near its historic low at 4.2%, but the job market shows signs of weakness due to these revisions.
The June inflation report pointed to an uptick in the prevailing rate of inflation, with the full impact of Donald Trump's tariff policy being felt. The Federal Open Market Committee's June 2025 meeting forecast a 3.1% core Personal Consumption Expenditure (PCE) inflation rate by the end of 2025, up from its prior forecast of 2.8% for core PCE, indicating inflation is expected to modestly pick up.
President Trump's tariff and trade policy is applying modest upward pressure on prices. The duties placed on China during his first term did a poor job of differentiating between output and input tariffs. This could contribute to the rising inflation rates.
However, the stock market seems to be unfazed by these economic headwinds. The S&P 500, Dow Jones Industrial Average, and Nasdaq Composite have historically proven to be resilient to short-term headwinds and can power through them over the long run. The S&P 500's Shiller Price-to-Earnings Ratio recently achieved a closing multiple of almost 39, making the current bull market the third-priciest when back-tested 154 years.
The S&P 500 is now in a new bull market, having risen 20% from its 10/12/22 closing low. Despite the possibility of stagflation, the major stock indexes are expected to continue their upward trajectory. However, it's important to note that historically, when valuations get extended to the upside, the S&P 500, Dow Jones, and/or Nasdaq Composite eventually fall 20%, or more.
The impact of President Trump's tariff policy on individual companies has also been a subject of study. Research by Liberty Street Economics found that companies negatively impacted by Trump's China tariffs in 2018-2019 experienced an average decline in sales, profits, labor productivity, and employment from 2019 to 2021.
Stagflation presents a nightmare scenario for the Fed because there's no blueprint for how to approach it. It's a situation where the usual tools for fighting inflation - raising interest rates - can weaken an already stumbling economy and jobs market, while lowering interest rates to spur growth can fan the flames of higher-than-desired inflation. As the economic landscape continues to evolve, it remains to be seen how the Fed will navigate this challenging terrain.
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