In a moment of stark, unvarnished honesty that cut through the noise of political rallies and partisan spin, Federal Reserve Chair Jerome Powell delivered a sobering assessment of the American economy. It wasn’t just a routine update; it was a bombshell. In careful, measured tones, Powell painted a picture so troubling it directly contradicts the narrative of unprecedented prosperity, warning of a near-term future where the twin nightmares of rising inflation and falling employment could converge.

This is the dreaded “challenging situation” that economists fear most. This is the shadow of stagflation.

Speaking with the careful precision of a man who knows his words can move markets, Powell effectively dismantled the prevailing political rhetoric. While President Donald Trump continues to champion the economy as “better than ever,” Powell, an independent appointee, provided a diagnosis based on data, not desire. The verdict? The economy is walking a tightrope, and the risks are tilted decidedly toward a painful fall.

The most explosive part of his testimony was the direct warning. “In the near term,” Powell stated, “risks to inflation are tilted to the upside and risks to employment to the downside.”

Let’s translate that from central banker-speak into plain English: We are facing a very real possibility that the cost of everything will keep going up, while at the same time, people start losing their jobs. This isn’t just a bad combination; it’s the toxic, economy-crippling cocktail known as stagflation, a phenomenon that haunted the 1970s and left deep economic scars that lasted for a decade. It’s a situation where the normal levers of economic policy stop working. Cutting rates to boost jobs makes inflation worse; raising rates to fight inflation throws more people out of work. It is, as Powell grimly understated, “a challenging situation.”

So, how did we get here? Powell didn’t just drop the warning and walk away. He explained the mechanics of the crisis, and his explanation pointed directly to the consequences of specific, high-profile policies.

The Tariff Time Bomb Explodes

First, Powell addressed the relentless rise in prices that families are feeling every time they go to the grocery store or pay a bill. He minced no words, identifying a key culprit: tariffs.

“Higher tariffs,” Powell explained, “are pushing up prices in some categories of goods, resulting in higher overall inflation.”

This is the predictable, real-world consequence that economists of all stripes have warned about for years. Tariffs—taxes paid on imported goods—don’t just get absorbed by foreign countries. They are passed on, creating a ripple effect of higher costs that ultimately lands on the American consumer. Powell acknowledged that a “reasonable base case” is that this inflationary effect might be a “one-time shift.” But then he delivered the caveat, the part that should keep people awake at night: “It is also possible,” he warned, “that the inflationary effects could instead be more persistent.”

In other words, this isn’t a temporary blip. It could be the new, painful normal. This inflation is not some mysterious force; it is, in part, a direct result of a trade policy that was promised to deliver American greatness but is instead delivering higher bills.

The Incredible Shrinking Job Market

The second, and perhaps more complex, part of Powell’s analysis focused on the “cracks in the job market.” Why, in an economy supposedly booming, is the job market getting so shaky?

Powell’s answer was profound. The primary driver, he explained, is “a dramatic reduction in the supply of new workers.” The engine of the American workforce is running out of fuel. This isn’t just a hunch; he broke it down into two core components.

The first is cyclical: a “declining labor force participation.” In simple terms, people are dropping out of the workforce. They aren’t just unemployed (which means they are actively looking for a job); they are gone. They are no longer looking, no longer counted, no longer contributing. This can be due to discouragement, early retirement, or a host of other personal reasons, but the trend is clear and it’s shrinking the available pool of talent.

The second component, however, is not cyclical. It’s a direct policy choice. Powell identified “declining immigration” as a massive factor, a change he noted “began in the last administration and it has been accelerated now.”

This is a critical admission. For years, the political debate around immigration has been framed almost exclusively as a social or security issue. Powell, as the nation’s top economic steward, just reframed it as what it has always also been: a core economic issue.

The “mass deportations” and restrictive policies championed by Trump are not just a political stance; they are an economic throttle. By aggressively lowering the supply of labor, these policies are starving the very industries—from construction to agriculture to hospitality—that form the backbone of the economy. You cannot build a booming economy when you are actively removing the builders.

The Double-Bind: Squeezed from Both Sides

This is where the true danger of the current economic experiment becomes clear. It’s a devastating double-bind.

On one side, as Powell noted, labor supply is being decimated by policy. On the other side, labor demand is also beginning to fall.

Why? Because the very same tariffs that are driving up inflation for consumers are also squeezing American businesses. When companies have to pay more for parts and materials, their “profitability,” as the host of the David Pakman Show rightly pointed out, takes a hit. And when profits fall, the first things to get cut are expansion plans, new hires, and, eventually, existing jobs.

So, Trump’s signature policies are, in effect, waging a two-front war on the labor market.

Deportations are lowering the supply of workers.
Tariffs are lowering the demand for workers.

This is not a recipe for a growing economy. It’s a recipe for a shrinking one. It is a deliberate economic contraction, and we are all being forced to live through the experiment.

The Irony of Desperate Demands

This dire diagnosis from the Fed Chair throws the political rhetoric surrounding the economy into sharp, almost comical, relief. For months, Trump has been “desperately demanding rate cuts.” He has publicly berated Powell, demanding that the Fed loosen monetary policy to supercharge the economy.

But as any Econ 101 student knows, you demand rate cuts when the economy is struggling, not when it’s the “better than ever.” You use that medicine when the patient is sick. The very fact that Trump has been demanding these cuts is a tacit admission that something is deeply wrong.

Powell, in his remarks, confirmed that the Fed has indeed cut rates, precisely because the data shows the economy needs support. He justified the move as a way to “support demand” and ensure the labor market “doesn’t get worse.” He was clear that rates are now “meaningfully less tight,” but he refused to promise more cuts. Why? Because he’s trapped. He’s already staring down the barrel of persistent, policy-driven inflation. Cutting rates further would be like throwing gasoline on that fire.

This is the corner we have been backed into. The Fed’s primary tools are being neutralized by counter-productive fiscal and trade policies.

What Happens Next?

It’s crucial to understand, as the Pakman show’s host noted, that not everything is a president’s fault. Global business cycles, the maturity of markets, and unforeseen events like a pandemic all play massive roles that are far beyond the control of any one politician, be it Trump or Biden.

But what Powell just did was separate those background factors from the specific, identifiable, and self-inflicted wounds. We cannot blame “global cycles” for the direct inflationary impact of new tariffs. We cannot blame “seasonality” for a labor shortage created by a new deportation policy.

These are choices. And as Powell’s chilling testimony laid bare, those choices have consequences.

The path forward is now fraught with peril. If stagflation does take hold, who will be blamed? Trump will undoubtedly blame the Fed. He will blame his political opponents. He will blame everyone but the policies he himself enacted.

But for those who were listening, Jerome Powell just provided the receipt. He read the data, he diagnosed the illness, and he pointed to the cause. The bomb has been dropped. The question now is whether anyone will bother to look at the damage before it’s too late.