Fed’s Dilemma on Inflation vs. Growth Risk

WASHINGTON (Reuters) – Recent surveys of business executives highlight the U.S. Federal Reserve’s dilemma in determining whether slowing growth or inflation poses a greater risk to the U.S. economy. Interest rate decisions depend on how policymakers interpret conflicting information in a volatile trade environment.

With new economic data supporting both sides, surveys from U.S. chief financial officers by the Fed and global executives by Dun & Bradstreet show business leaders expect ongoing tension. They plan price increases while forecasting weaker revenue and demand.

This uncertainty could delay the Fed’s potential interest rate cuts, risking further tension with President Donald Trump who recently called for steep rate cuts and for Fed Chair Jerome Powell to resign. Treasury Secretary Scott Bessent described the Fed’s rate posture as “a little off.”

The CFO survey, conducted by the Atlanta and Richmond Federal Reserve banks with Duke University, shows executives planning price hikes even among companies not directly impacted by tariffs, indicating that persistent inflation could be on the horizon. Policymakers advocating for sooner rate cuts argue tariffs may cause a temporary price shock rather than ongoing inflation.

Brent Meyer, an Atlanta Fed economist, warned about broader price pressures not limited to those affected by tariffs. Executives at the Fed voiced concerns over the time needed for firms to adjust, suggesting significant upward pressure on prices and inflation may last.

A Dun & Bradstreet survey indicated a shift in sentiment following Trump’s tariff announcements, with firms seeking to restructure supply chains and reduce dependence on U.S. markets. Although this could increase costs, the overall outlook points to slower expected growth. The quarterly poll reveals declining optimism and concerns over supply chain durability.

Businesses appear hesitant to simply accept tariffs as a temporary issue, delaying capital expenditure and vendor payments. Following Trump’s April tariff announcement, Powell noted a change in sentiment to a more positive outlook. However, businesses still face the challenge of managing higher-than-expected tariffs.

High uncertainty regarding White House policies compels Fed officials to monitor surveys and interviews closely to gauge how decision makers are responding. The expectation among corporate officials of raising prices is a key reason for the Fed’s reluctance to cut rates, fearing that looser credit would fuel inflation.

Rate cuts are anticipated by investors starting in September, but the Fed remains divided on projections, with some policymakers advocating for cuts this year while others push monetary policy easement into 2026. Powell emphasizes that data will guide decision-making, stating that no clear justification for rate cuts currently exists.

The unemployment rate fell to 4.1% in June with 147,000 new jobs added. Although consumer spending is slowing, recent inflation figures have exceeded expectations. A JPMorgan Chase Institute study indicated that middle-market firms face significant tariff costs, requiring them to assess how these additional expenses will impact profits and pricing.

CFOs reported doubling price increase plans for the coming year, often exceeding expected revenue growth, hinting at anticipated slower business. This scenario could challenge the Fed with stagflation in the future. Citi’s Chief Global Economist Nathan Sheets described the tariffs as a stag-flationary shock.