Markets drop as Powell warns of stagflation

Markets took a dive Wednesday after Federal Reserve Chair Jerome Powell painted a stagflationary picture of risks facing the economy, warning of both lower growth and higher prices as a result of the Trump administration’s tariff policies.

The Dow Jones Industrial Average dropped 700 points or 1.7 percent after starting the day off with some gains. The S&P 500 was down 2.3 percent, and the technology heavy Nasdaq Composite lost more than 3 percent of its value.

Tech was hit particularly hard again, with the SPDR NYSE technology exchange-traded fund posting a 3.1 percent loss on the day.

Speaking at an event in Chicago, Powell said the economy would be “moving away” from its goals of stable prices and maximum employment, saying there might not be “any progress” on them for the remainder of the year.

“I do think we’ll be moving away from those goals, probably for the balance of this year, and then – or at least not making any progress – and then we’ll resume that progress as we can,” he said.

First quarter gross domestic product (GDP) results won’t be released for another two weeks, but Powell said that data he’s seen suggest growth has slowed relative to last year’s robust pace.

“The data we have in hand so far suggest that growth has slowed in the first quarter of this year,” he said.

The Atlanta Fed’s first-quarter GDP forecast was at negative 2.2 percent on Wednesday. GDP grew at 2.4 percent in the fourth quarter and at 3.1 percent in the third quarter.

With slowing growth and potentially higher prices on the horizon, Powell said he foresaw a scenario in which the Fed’s dual mandate of stable prices and low unemployment would be in conflict with each other.

“Our tool does only does one of those two things at the same time,” he said, referring to the Fed’s setting of interbank lending rates.

If prices rise along with unemployment, the Fed would “consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close,” he said.

Powell has said he sees the Trump tariffs as providing a one-time upward push to prices but that it will be the Fed’s job “to make sure that it will be a one-time increase in prices and not something that turns into an ongoing inflation process.”

“That’s a big part of our job,” he said.

Economists are concerned that the tariffs, if they’re expanded further and left in place for a long time, could turn into a general “supply shock,” something not totally dissimilar from what happened during the pandemic when increases in downstream commodity costs translated through value chains and led to a widespread increase in prices.

Updated at 4:37 p.m. EDT