Stagflation Watch: Where We Stand
Current economic snapshot:
Labor markets have cooled sharply, with job creation slowing from over 200,000 positions per month at the end of 2024 to around 50,000 currently. Vanguard Unemployment is expected to rise to 4.5% in 2026, up from 4% in 2024. Deloitte Insights Meanwhile, core PCE is projected at 3% in 2026, keeping inflation above the Fed's 2% target until the end of 2028. Deloitte Insights
So we have: slowing job growth, rising unemployment, and sticky inflation above target. That's the early profile of stagflation risk, though not full blown stagflation yet.
What's driving the concern:
Inflation is rising in response to shifts in trade and immigration policy, while those same shifts are boosting unemployment. KPMG This is the policy induced supply shock scenario — tariffs raising prices while labor supply restrictions and weaker demand push unemployment higher. Work by the St. Louis Federal Reserve revealed that consumer inflation expectations may be becoming unmoored. KPMG
The base case (not stagflation):
Most forecasters still expect a soft landing. The NY Fed expects inflation to peak at around 2-3/4 to 3 percent sometime during the first half of this year, before starting to fall back, reaching just under 2-1/2 percent for the year as a whole. New York Fed GDP growth is expected above 2% in 2026 Vanguard — that's stagnation avoided.
How Warsh Changes the Calculus
The bull case (reduced stagflation risk):
Today's market reaction tells the story. Gold crashed because Warsh is viewed as more hawkish and independent than feared alternatives. Evercore said the Warsh pick "should help stabilize the dollar some and reduce the asymmetric risk of deep extended dollar weakness by challenging debasement trades." CNBC
If Warsh maintains credibility and doesn't simply do Trump's bidding, the Fed retains its inflation fighting ability. A credible Fed anchors expectations, which is the key to preventing a wage price spiral.
The bear case (elevated stagflation risk):
Warsh still faces enormous political pressure. Trump has been explicit about wanting aggressive cuts. If Warsh accommodates — cutting into sticky inflation to juice growth before midterms — you get the 1970s playbook: easy money when you should be tightening, inflation becomes entrenched, and when the economy eventually slows anyway, you're stuck with both problems.
Bond markets have grown skittish; investors are not buying what the Fed is selling. Bond yields have moved up since the Fed resumed its cutting cycle. KPMG That's the market signaling it doesn't fully trust the Fed's inflation commitment.
Bottom Line
We're not in stagflation, but we're in the neighborhood where it could develop. The ingredients are present: supply shocks from tariffs, labor market cooling, inflation above target, and now political pressure on the Fed.
The Warsh nomination is a coin flip. He could be the adult in the room who maintains credibility, or he could be the accommodative chair who lets inflation run. Today's gold selloff suggests markets are betting on the former, but that bet hasn't been tested yet.