WASHINGTON — Recent economic projections from Federal Reserve officials had shades of “Stagflation-lite,” in the words of one economist, a sentiment increasingly echoed among other observers of the US economy and central bank wondering if the country’s outperformance during the pandemic is about to slide.

So what is stagflation and why is it suddenly on everyone’s mind?

THAT (BAD) ’70s SHOW
Stagflation, or a period of both high inflation and high joblessness, hit the US notably in the 1970s, which may have featured the worst US economic leadership since the Great Depression. Fed officials had their data and their framework wrong, and elected officials flailed against inflation with price controls and what now seem quaint public relations efforts, most notoriously the Ford administration’s “Whip Inflation Now (WIN)” button campaign.

As economists in recent weeks have begun marking down their estimates of economic growth and marking up estimates of inflation in the face of dramatic economic policy shifts under President Donald Trump, it has sparked debate about whether that could be unfolding again now.

In theory, a weak economy with rising unemployment undercuts inflation, so the two should not coexist. But as with oil price shocks in the 1970s that drove prices higher, the tariff shock anticipated from Mr. Trump’s trade policies now has the world guessing.

The Trump administration says the tariffs are part of what they bill as a transition for the economy that, coupled with other efforts to deregulate industry and cut taxes, will produce both plentiful jobs and lower inflation.

The hints of stagflation in current forecasts aren’t near as bad as the 1970s, a decade in a league of its own when a surge in the so-called “misery index” combining the unemployment and inflation rates still stands out in charts of postwar economy.

But the direction of travel for major aspects of the economy has caught economists’ attention. When Fed officials this week assessed the risks they see ahead they pointed uniformly towards higher inflation and higher unemployment than previously expected.

“Stagflation-lite,” is what RSM chief economist Joe Brusuelas titled his analysis of the Fed’s meeting last week. Policymakers’ forecasts “implied mild stagflation ahead in the near term as growth slows and inflation increases,” he said, noting the “pervasive uncertainty around the size and magnitude of the trade shock.”

‘NOTHING MORE UNCOMFORTABLE’
Fed policymakers last week left interest rates unchanged but still anticipate two quarter-point cuts by yearend. Their new economic projections, however, laid bare their conundrum. Growth is anticipated to slow, unemployment to rise a bit more than expected, and inflation to accelerate in the face of existing and widening tariffs.

Implied by their forecasts of rate cuts and higher inflation is a belief that tariff-triggered price increases would be one-off jumps, the same assumption the Fed made early in the pandemic when it called rising prices “transitory” — and was proven wrong.

Things are different now. Factories and ports are open and goods are flowing.

But given the scope and breadth of what Mr. Trump is planning, officials say the outcome remains unpredictable.

Hard macroeconomic data, as Fed Chair Jerome Powell noted in his press conference last week, remain solid. The misery index is rather low in fact.

But softer measures like sentiment are sliding, something policymakers feel could cause businesses to stall investment and hiring and households to cut back, even as tariffs lead prices to keep rising. Fed officials note growing concern among business contacts, and have begun discussing the difficult choice moments of stagflation pose for a central bank tasked with controlling inflation while sustaining employment.

“There is nothing more uncomfortable than the stagflationary environment…where both sides of the mandate start going wrong. There is not a generic answer…Which is worse? Is it bigger on the inflation side? Is it bigger on the job market side?” Chicago Fed President Austan Goolsbee said Friday on CNBC. “Higher tariffs raise prices and reduce output so that is a stagflationary impulse.”

NOTHING TAKEN FOR GRANTED
If the Fed is caught in the middle, their priority is clear: To ensure that not just inflation, but public expectations about inflation, remain under control.

Perhaps the key mistake of the 1970s was a failure to understand better the role that public psychology plays in future inflation. Scarred by rising prices, Americans’ belief that costs would keep on rising kept pushing prices higher even as the economy weakened.

It took punishing interest rates and two successive recessions under Fed chief Paul Volcker to begin to establish the Fed’s credibility and reset expectations through the rest of the 1980s and into the 1990s.

That’s a lesson Mr. Powell has said he takes to heart, and one he says he won’t repeat.

“I don’t see any reason to think that we’re looking at a replay of the ’70s or anything like that…Underlying inflation is still running in the twos, with probably a little bit of a pickup associated with tariffs,” Mr. Powell said at a press conference after the Fed’s most recent meeting. “I wouldn’t say we’re in a situation that’s remotely comparable to that.

But stable inflation expectations are “at the very heart of our framework,” he said. “We will be watching all of it very, very carefully. We do not take anything for granted.” — Reuters

WASHINGTON — China remains the top military and cyber threat to the US, according to a report by US intelligence agencies published on Tuesday that said Beijing was making “steady but uneven” progress on capabilities it could use to capture Taiwan.

China has the ability to hit the US with conventional weapons; compromise US infrastructure through cyber attacks; and target its assets in space, the Annual Threat Assessment by the intelligence community said, adding that Beijing also seeks to displace the US as the top artificial intelligence (AI) power by 2030.

Russia, along with Iran, North Korea and China, seeks to challenge the US through deliberate campaigns to gain an advantage, with Moscow’s war in Ukraine affording a “wealth of lessons regarding combat against Western weapons and intelligence in a large-scale war,” the report said.

Released ahead of testimony before the Senate Intelligence Committee by President Donald Trump’s intelligence chiefs, the report said China’s People’s Liberation Army (PLA) likely planned to use large language models to create fake news, imitate personas, and enable attack networks.

“China’s military is fielding advanced capabilities, including hypersonic weapons, stealth aircraft, advanced submarines, stronger space and cyber warfare assets and a larger arsenal of nuclear weapons,” Director of National Intelligence Tulsi Gabbard told the committee. She labeled Beijing as Washington’s “most capable strategic competitor.”

“China almost certainly has a multifaceted, national-level strategy designed to displace the United States as the world’s most influential AI power by 2030,” the report said.

CIA Director John Ratcliffe told the committee that China had made only “intermittent” efforts to curtail the flow of precursor chemicals fueling the US fentanyl crisis due to its reluctance to crack down on lucrative Chinese businesses.

Mr. Trump has increased tariffs on all Chinese imports by 20% to punish Beijing for what Mr. Trump called its failure to halt shipments of fentanyl chemicals. China has denied playing a role in the crisis, the leading cause of US drug overdose deaths. The issue has become a major point of friction between the Trump administration and Chinese officials.

“There is nothing to prevent China … from cracking down on fentanyl precursors,” Mr. Ratcliffe said.

The spokesperson for China’s embassy in Washington, Liu Pengyu, said the US has long “hyped up” the China threat as an excuse to maintain US military hegemony.

“China is determined to be a force for peace, stability and progress in the world, and also determined to defend our national sovereignty, security and territorial integrity,” Mr. Liu said, adding that “fentanyl abuse is a problem that the United States itself must confront and resolve.”

INTELLIGENCE LEAK FUROR OVERSHADOWS HEARING
The committee hearing was overshadowed by Democratic senators grilling Mr. Ratcliffe and Ms. Gabbard over revelations that they and other top Trump officials discussed highly sensitive military plans in a Signal messaging app group that accidentally included a US journalist.

Numerous Republican senators focused their questioning on undocumented immigrants in the US.

The intelligence report said large-scale illegal immigration had strained US infrastructure and “enabled known or suspected terrorists to cross into the United States.”

The intelligence agencies said Iran was committed to developing surrogate networks inside the US and to targeting former and current US officials.

While Iran continued to improve its domestically produced missile and UAV systems and arm a consortium of “like-minded terrorist and militant actors,” they said, the US continues to assess that Tehran “is not building a nuclear weapon.”

US concerns about China dominated about a third of the 33-page report, which said Beijing was set to increase military and economic coercion toward Taiwan, the democratically governed island China claims as its territory.

“The PLA probably is making steady but uneven progress on capabilities it would use in an attempt to seize Taiwan and deter — and if necessary, defeat — US military intervention,” it said.

The intelligence agencies said China’s long-term goal was to expand access to Greenland’s natural resources and use it as a “key strategic foothold” in the Arctic.

US Vice-President JD Vance said he would visit Greenland this week while accompanying a high-profile US delegation. Mr. Trump has angered NATO ally Denmark and Greenland with renewed calls for the US to take over the semi-autonomous Danish territory, calling the proposal a US national security imperative.

Still, the report said, China faces “daunting” domestic challenges, including corruption, demographic imbalances, and fiscal and economic headwinds that could impair the ruling Communist Party’s legitimacy at home.

China’s economic growth probably will continue to slow because of low consumer and investor confidence, and Chinese officials appear to be bracing for more economic friction with the US, the report said. — Reuters

WASHINGTON — America’s top spies on Tuesday shifted the spotlight back to Defense Secretary Pete Hegseth to explain how highly sensitive details he posted in a telephone chat about imminent US strikes on Yemen were not classified.

President Donald Trump’s administration has sought to contain fallout from an explosive article on Monday by The Atlantic’s editor-in-chief Jeffrey Goldberg, revealing that he was included in a group chat on the encrypted messaging app Signal with Mr. Trump’s most senior national security advisors to coordinate on Yemen.

Mr. Goldberg said Mr. Hegseth posted war plans shortly before the first wave of attacks on March 15 “including information about targets, weapons the US would be deploying, and attack sequencing,” which he read from a supermarket parking lot on his phone. 

Still, Mr. Trump’s administration said on Tuesday that no classified information was shared in the chat, bewildering Democrats and former US officials, who regard that kind of targeting information as some of the most closely-held material ahead of a US military campaign.

“There was no classified information, as I understand it,” Mr. Trump said on Tuesday.

Director of National Intelligence Tulsi Gabbard and Central Intelligence Agency Director John Ratcliffe also said no classified information was shared. But, pressed, they said Mr. Hegseth would be the one to determine what defense information is classified.

“The Secretary of Defense is the original classification authority for DOD in deciding what would be classified information,” Mr. Ratcliffe said.

Asked if details about the strikes on the Houthis, like attack sequencing and timing, would not have been considered classified, Ms. Gabbard said: “I defer to the Secretary of Defense and the National Security Council on that question.” 

For his part, Mr. Hegseth has denied sharing war plans in the group chat.

“Nobody was texting war plans, and that’s all I have to say about that,” he told reporters while on an official trip to Hawaii on Monday.

Mr. Goldberg responded to Mr. Hegseth’s denial in an interview on CNN late on Monday by saying, “No, that’s a lie. He was texting war plans.”

Senior US national security officials have classified systems that are meant to be used to communicate secret materials. Mr. Ratcliffe said National Security Advisor Mike Waltz set up the Signal chat for unclassified coordination and that teams would be “provided with information further on the high side for high-side communication.”

“So I think clearly it reflects that the national security advisor intended this to be — as it should have been — a mechanism for coordinating between senior level officials, but not a substitute for using high-side or classified communications for anything that would be classified,” he said.

“And I think that is exactly what did happen.”

A US official, speaking on the condition of anonymity, said that if the information was coming from within the Defense Department, Mr. Hegseth could have de-classified it, even outside of a formal process.

But another official said that there was a process for de-classification within the Pentagon and if Mr. Hegseth decided to unilaterally de-classify the information in the group chat, it would be “extremely suspect.”

US Senate Majority Leader John Thune said on Tuesday he expects the Senate Armed Services Committee will look into the issue.

“I think everybody has acknowledged, including the White House, that mistakes were made and what we want to do is make sure that something like that doesn’t happen again,” Mr. Thune told reporters at the Republican leaders’ weekly press briefing.

Republican Rep. Don Bacon, a retired Air Force general who sits on the House Armed Services Committee, told reporters that Mr. Hegseth needed to take responsibility for the breach, which he said put lives at risk.

Asked about the White House claim that no classified details were shared, Mr. Bacon responded: “They ought to just be honest and own up to it.” — Reuters