Chief Economist Says the Fed May Raise Interest Rates Due to a Serious Risk of Stagflation in the U.S. – What Is Stagflation?

As the global economy faces the risk of renewed stagflation due to rising geopolitical tensions, auditing and consulting firm KPMG has issued a striking warning.

Diane Swonk, the company’s chief economist, stated that the war with Iran, in particular, has severely disrupted economic balances and could force central banks to take unexpected steps.

According to Swonk, the risk of stagflation is becoming increasingly pronounced when rising global energy prices and economic slowdown are considered together. Stagflation is a situation where high inflation and weak economic growth occur simultaneously, presenting an extremely difficult scenario for policymakers to resolve. Swonk warned that if this process cannot be brought under control, the US economy could be dragged into a “deep recession.”

Swonk noted that the closure of the Strait of Hormuz, in particular, led to a sharp rise in oil prices, adding that the developments went far beyond a classic oil shock. He stated that rising energy costs increased production and logistics expenses, creating persistent pressure on overall price levels, and that companies significantly reduced hiring in this environment.

The combination of all these developments is causing both high inflation and weakening economic growth, and investors appear to share similar concerns. In his assessment of the current situation, Swonk stated that the Fed may be forced to raise interest rates in the second half of the year. He added that this step might not be limited to the US alone, and that other major central banks could similarly adopt tightening policies.

*This is not investment advice.