A prominent economist has issued a stark warning about stagflation, a potential concern for the Federal Reserve in the coming year. Torsten Sløk, the chief economist at Apollo Global Management, expressed that stagflation remains one of the most significant risks to the economy, even as recent inflation data has provided a momentary sense of relief among investors.
Sløk pointed out the ongoing challenges that may hinder economic growth, particularly if advancements in artificial intelligence do not yield the expected returns. He indicated that inflation, being persistently high, poses limitations on the Federal Reserve’s ability to lower interest rates, which are typically employed to stimulate growth. As inflation shows signs of “stickiness,” he posed a critical question for the Federal Open Market Committee (FOMC): whether interest rate cuts are feasible in an environment where inflation could rise again.
The concept of stagflation—characterized by stagnant economic growth combined with high inflation—complicates the situation for policymakers. While key economic metrics indicated robust growth, with the GDP reportedly expanding by 3.5% in the third quarter and inflation cooling to a year-over-year rate of 2.7% according to the November Consumer Price Index, Sløk remains cautious. He emphasizes that the U.S. economy’s susceptibility to stagflation should not be overlooked.
Concerns about the tech sector, particularly in AI investments, underpin some of these fears. Sløk highlighted the possibility that companies may cut back on spending in this area or that substantial investments in AI may not translate into the expected financial returns. Compounding this uncertainty, the ISM Services Prices Index signaled continued inflationary pressure, landing at 65.4% in November—firmly in expansion territory.
Moreover, there seems to be a growing consensus among central bankers regarding the risks of stagflation. Sløk noted that many members of the FOMC perceive inflation and unemployment risks as tilted to the upside, contrasting with a smaller contingent that believes the risks lean downward.
As he articulated in a recent note, “The Fed continues to forecast stagflation and is concerned that we in 2026 may experience rising inflation and rising unemployment at the same time.” Looking ahead, he warned that significant risks related to elevated inflation might become more apparent, particularly as the new year unfolds.
The prospects for interest rate cuts appear dim, with market expectations leaning toward the Fed maintaining current rates during its next meeting. Following the November inflation data, there was a slight increase in the likelihood of a 25-basis-point cut in January. However, overall, investors seem to anticipate a steady rate environment, with only a 45% probability for rate cuts by the March meeting, according to the CME FedWatch tool.
In summary, as concerns about stagflation loom, the trajectory of both inflation and interest rates will be critical areas to monitor in the coming months.
