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Investing.com-- The Federal Reserve is bracing for a difficult policy dilemma as the disruptive rollout of new tariffs under President Donald Trump heightens the risk of both slower growth and renewed inflation, creating a "lose-lose" scenario, according to a Wall Street Journal report by Nick Timiraos.
The central bank now faces a difficult choice between waiting too long to cut interest rates and acting prematurely, which could worsen inflationary pressures, the report stated.
At the heart of the issue is the risk of stagflation, triggered by trade-related cost increases and supply chain disruptions, Timiraos wrote.
Fed officials are expected to keep rates steady during this week’s policy meeting, maintaining a cautious approach while monitoring how tariffs impact both inflation and the labor market, according to the report.
While some officials see reasons to remain patient, citing lingering inflation risks and uncertainty around how tariffs will affect consumer and business behavior, others are concerned about the growing likelihood of a sharper economic slowdown, the WSJ report said.
Internal divisions are emerging over how temporary or persistent price increases might be and whether the Fed should prioritize avoiding recession or reinforcing its inflation-fighting credibility, according to the report.
The Fed remains wary of repeating past mistakes, such as underestimating inflation during the pandemic recovery. For now, officials appear inclined to wait for clear signs of economic deterioration before cutting rates, even if that means tolerating short-term pain, Timiraos wrote.
If consumers and businesses continue to expect prices to stabilize, the central bank could gain more flexibility. If not, policymakers may be forced to stay on hold longer, even as growth slows, the report added.