Trump’s berserker blitz of policies raises risks of stagflation, wild market moves

(Originally published Feb. 13 in “What in the World“) A federal judge cleared Trump’s buyout plan for federal workers.

That means roughly 65,000 civil servants will take eight months’ severance to leave their jobs. That represents roughly 3% of the federal workforce, below the 5%-10% the White House target. More than 5% of the government’s employees resign or quit in a typical year anyway. But those workers are usually replaced. U.S. President Donald Trump is reportedly preparing another order that restricts government agencies to replacing only one of every four employees who leave, meaning that routine government services—like obtaining a new passport—could be delayed.

As Trump continues to torpedo the case for investment, investors worry the U.S. economy could face a rising risk of stagflation. Signs are emerging that Trump’s escalating tariffs may backfire, with Ford Motor warning they may hit profits and cause layoffs, and U.S. refineries facing higher costs for Canadian crude.

Despite the weakening outlook for growth, inflation remains stubbornly high. The U.S. Labor Dept. said its consumer price index rose to 3% in January, from 2.9% in December, led higher by rising prices for gasoline, groceries, and lodging. Leading the charge on Americans’ shopping baskets are eggs, with the wholesale price for a dozen climbing to $8—double what it was a year ago. A widening outbreak of bird flu on U.S. farms is forcing farmers to cull millions of hens.

With inflation accelerating, the U.S. Federal Reserve is unlikely to give Trump and the market what they both want: lower interest rates. Testifying before the Senate Banking Committee Tuesday before the latest inflation data, Fed Chairman Jerome Powell, citing a still-resilient job market and persistent inflation, said there was no hurry to lower rates.

Uncertainty about what Trump’s policies will be, how they will affect government regulations and spending, and how the U.S. economy will respond are already having a dampening effect on the private sector. Consumer sentiment in one February poll dropped to its lowest since November 2023, with many small businesses hit by fear among immigrants that they’ll be swept up in Trump’s deportation drive. And despite hopes that deregulation would unleash a flurry of corporate deals, corporate mergers and acquisitions in January fell to their lowest in a decade. U.S. companies have been setting up “war rooms” and hotlines to try to make sense of the flurry of orders emanating from the White House and how they’ll affect business.

That uncertainty is also affecting markets, where investors are seeking to hedge themselves against the whipsaw effect of Trump’s vacillating policy statements. While volatility remains historically low, investors have been snapping up options contracts on the CBOE’s VIX index, which measures short-term volatility in the S&P500 index.