The Stagflation Risks Are Bigger Than the Fed Thinks

Stock investors don’t like slow economic growth because that means slower earnings growth, too, which is a headwind for equity prices. And they don’t like inflation because that erodes the present value of future earnings, a different and often more substantial headwind for stocks. If you combine the two — slow growth and higher inflation -- you get the worst of all worlds. So investors rightfully absolutely hate stagflation.

Now that we’ve got a taste of the Trump administration’s economic policies and we’ve seen how the Fed reacts, it’s worth thinking through the implications of stagflation — a concern that briefly haunted markets back when inflation was surging but never materialized. Trump could very well bring it back out of hiding — with significant implications for asset markets. The Fed itself on Wednesday lent some support to those worries by telegraphing expectations for slowing growth and higher inflation.