Trump's tariff threat against Europe is imminent: the US economy may face stagflation challenges, and the Federal Reserve's policy is caught in a dilemma.

As inflation temporarily cools and the unemployment rate remains stable, while the US stock market even returns to historical highs, the Trump administration's tariff ambitions have not diminished. On August 1, a new 30% tariff on the European Union is set to take effect—this policy, regarded as the "epicenter of transatlantic trade," is putting the US economy through a delayed "stress test," and the Federal Reserve's monetary policy space is being squeezed into a narrow zone.

Tariffs are in place: The risk of supply chain disruptions is far greater than expected.

As the world's largest bilateral trading partners, the deep binding of the US and EU supply chains far exceeds external imagination. From automotive parts to precision instruments, from chemical raw materials to medical equipment, the industrial collaboration between the two sides has penetrated all links of the industrial chain. Now, with a 30% tariff rate, not only is it higher than market expectations a few weeks ago, but it also led European Commission President Ursula von der Leyen to state, "This is not a simple trade friction, but a direct destruction of the transatlantic supply chain, affecting corporate costs, consumer wallets, and even the supply of life-saving drugs for patients, all of which will be caught in the whirlpool."

The warning from economist Eric Vinograd of the International Institute is more straightforward: "The tariff rate is almost directly proportional to the risk of stagflation. When the tax rate exceeds 20%, the 'double kill' effect of rising prices and economic contraction will become apparent—this time, a 30% tax rate may cause the U.S. to experience a pain that is greater than the tariffs on China in 2018."

Corporate Dilemma: After depleting inventory, either price increases or layoffs must be chosen.

Currently, American companies are relying on previously accumulated inventory to "buffer" the impact of tariffs, which has allowed White House economic advisor Hassett to claim that there has been "no negative impact" due to the "continuous decline in import prices since February." However, this kind of "data beautification" has been widely questioned by academia—TS Lombard's chief economist Steven Blitz pointedly remarked: "Inventory is like a painkiller; it can alleviate pain temporarily but does not cure the root cause. When the inventory runs out, companies either have to import at higher costs or watch their profits be consumed."

Ryan Sweet, chief economist at the Oxford Economics Institute, estimates that the effective tariff rate for the U.S. on Europe is currently close to 20% (this figure will rise further if the 30% tariff is fully implemented). He points out that the choice for companies is essentially "cost pass-through or profit sacrifice": if the tariff costs are passed on to consumers, the already cautious consumer demand may shrink further; if absorbed internally, layoffs will become the last resort for "survival" when profits are razor-thin. "Whichever path is chosen, the economy will be hurt; the only difference is whether the pain is felt in prices or employment."

Stagflation Shadow: Inflation and Recession Risks Rising on Both Fronts

The real threat of this tariff storm lies in the possibility of pushing the United States into a quagmire of "stagflation."

From the perspective of inflation, tariffs are essentially an "import cost tax." When companies are forced to import European goods at higher prices, the prices of terminal consumer goods such as clothing, household appliances, and automobiles will rise accordingly, directly pushing up the CPI—tariffs on China in 2018 caused a 0.3 percentage point increase in the U.S. core CPI in a single month, and this time the range of affected goods is broader, which may lead to a more significant impact on prices.

From the growth perspective, if companies choose to lay off employees to maintain profits, the rising unemployment rate will suppress consumption and investment, and the already weak manufacturing sector (with PMI below the expansion line for three consecutive months) may face even more difficulties. Steven Blitz bluntly stated, "This is a 'corporate profit harvesting war,' which will ultimately either drive up inflation or pull down growth, with the worst-case scenario being that both occur simultaneously."

The Federal Reserve's "Wire Walk Moment": Cut Interest Rates or Control Inflation?

The market originally bet that the Federal Reserve might start cutting interest rates in September to hedge against economic downturn pressures, but the arrival of tariffs has made this expectation unclear.

If tariffs push up prices, and the Federal Reserve insists on cutting interest rates, it may cause the recently cooled inflation to "flare up" again; if it pauses interest rate cuts to control inflation or even restarts rate hikes, it may accelerate the economy's slide into recession. Kathy Bostjancic, chief economist at Nationwide, describes: "The Federal Reserve is now like walking on a tightrope, with temporary inflation on the left and increasing recession risks on the right; any imbalance could trigger a chain reaction."

There is a serious divide in academia: optimists believe that the impact of tariffs is short-term, and the Federal Reserve can still cut interest rates in September as originally planned; the cautious side warns that if inflation becomes stickier than expected, the delay in policy adjustments may solidify the risk of stagflation—by then, whether raising or lowering interest rates, it will be difficult to reverse the downward trend.

Conclusion

The tariff deadline on August 1 has entered the countdown, and this policy-driven "trade experiment" is pushing the U.S. economy into uncharted waters. The "buffer period" for corporate inventory will eventually come to an end, and the real pressures on prices and employment will gradually emerge, while every policy swing by the Federal Reserve may be magnified by the market into new volatility.

As Vinogradov said: "Tariffs have never been a 'zero-sum game'; when the cost of a disrupted supply chain is borne by everyone, the so-called 'trade advantages' will ultimately turn into 'negative assets' for the economy." #BTC# #ETH#