July 1974: Americans were abandoning their cars on freeways—not from breakdowns, but because gas stations had nothing to sell.

Autoweek

The oil crisis had already begun in October 1973 so by July 1974 the U.S. was dealing with its economic aftermath. Nixon was grappling with stagflation - the unusual combination of high inflation and rising unemployment. His administration was trying to balance competing pressures: inflation was running high (around 11-12% annually) but unemployment was also climbing as the economy slowed.

The fed rates back then was around 3% to 4% while inflation reached maximum 13% by mid 1974. The lowered rates were unable to compensate for the high oil prices. This resulted in stagnation- high unemployment AND high prices at the same time. Oil crisis made everything expensive, so people bought less, so companies fired workers. But prices stayed high because oil was still expensive. Politicians didn't know what to do - every solution made one problem worse while trying to fix the other.

Now, I think history might repeat itself in 2025 under Trump.

The Federal Reserve cut its benchmark rate by 0.25 percentage points on 17th September 2025, reducing the federal funds rate to a range of 4% to 4.25% with indications of further reduction (fidelity).

However, if the tariff situation does not change and US supply chain costs remain high then there could be a repeat of 1974.

History Rhymes: 2025's Impossible Choice

Fast-forward to September 2025 and Jerome Powell faces the same nightmare as Arthur Burns: tariffs pushing both inflation and unemployment up simultaneously. The Fed cuts rates to save jobs while trade wars fuel inflation—textbook logic says this shouldn't work.

Five Forces Creating the Perfect Storm

1. The $300 Billion Tax Bomb: Trump's tariffs aren't trade policy—they're tax hike hitting everything from Chinese phones to Indian medicines. Unlike the 1970s oil shock imposed by foreigners, this one is self-inflicted and permanent. Trump's annual tariff revenue target, based on various sources and analyses, is estimated to be in the range of $150 billion to $300 billion per year from the increased tariffs imposed on imports.

USA won’t be able to suddenly start their factories even if they poured billions as the unit economics wont make sense with higher wages and input costs relative to China and other countries. Even if USA decides to consume only US made goods and services; higher prices will lower demand, increase inefficiency, reduce FDI and portfolio investment, reduce dollar prowess, reduce exports as others countries income reduces from lowered US imports they have to adjust their consumptions. I mean…I can go on and on!

US import tariffs are at the highest rate since World War 2. In 2024, the US imported $4.1 trillion worth of goods and services and exported around $3.2 trillion (bea). The largest deficits are with China: $295.4 billion deficit, European Union: $235.6 billion deficit, Mexico: $171.8 billion deficit and Vietnam.

The US excels in high-value services (finance, technology, entertainment) and advanced manufacturing while many physical goods can be produced more cost-effectively in countries with lower labor costs.

The US has a large, affluent consumer market that demands manufactured goods often produced more cheaply abroad.

The deficit isn't necessarily problematic - it reflects the US role as a major consumer market and its specialization in high-value services and technology while other countries specialize in manufacturing and assembly.

The higher US wages can support high margin products like Boeing commercial planes but not a $3 t-shirt from Vietnam.

The rising raw material and product costs from tariffs will not be compensated by small reduction of fed rates.

Prime Rate Connection:

The prime rate (what banks charge their best customers) typically moves point-for-point with the federal funds rate. If the Fed cuts rates by 0.25% (25 basis points), the prime rate usually drops by exactly 0.25%

Business Loan Rates:

Small business loans: Often tied directly to prime rate + a margin, so they typically move 1:1 with Fed rate changes

Commercial loans: Usually track closely, dropping 0.20-0.30% for every 0.25% Fed cut

SBA loans: Many are tied to prime rate, so they move nearly 1:1

Lines of credit: Often prime-based, so they adjust immediately and fully

2. The Deportation-Driven Wage Spiral Mass deportations will yank millions from agriculture, construction and hospitality. Wages spike from artificial scarcity just as the Fed tries to stimulate with lower rates.

epi

Mass deportation would increase authorized low-skilled worker wages by 1.1% under a 4-year policy (but wages eventually fall to -0.6% by 2054) or by 5.0% under complete 10-year removal that persists at 4.7% long-term (census).

However, high-skilled workers (63% of the workforce) would see wages decline by 0.5-2.8%, and the policy would cost $270-987 billion while reducing GDP by 1.0-4.9%. The wage gains for blue-collar workers come at the expense of broader economic contraction and significant costs to the majority of the workforce.

3. The Dollar's Death Spiral Rate cuts weaken the dollar making imports costlier when tariffs already inflate prices.

Worse: foreign investors holding 24% of America's $37 trillion debt are getting nervous. Currency weakness could trigger an exodus forcing rate hikes when the economy needs stimulus. This happened during oil crisis when rates were suddenly increased to around 20%.

Gradual corrections are better than a sudden shock.

4. Investment Paralysis Why build factories when the next tweet could impose 25% tariffs?

Businesses freeze spending despite cheap money. Instead of productive investment, capital flows to financial bubbles.

5. The Ukraine Wild Card Ongoing war keeps energy volatile and military spending high—supply shocks the Fed can't control with demand stimulus.

When Safe Haven Status Dies

Rate cuts risk ending America's "exorbitant privilege"—borrowing cheaply because the dollar is the world's reserve currency. Foreign central banks already question whether U.S. debt deserves premium pricing.

When they stop buying then yields spike thus forcing the Fed to choose: support Treasury markets or the domestic economy.

The Volcker Moment Approaches

The 1970s ended only when Paul Volcker raised rates to 20% triggering a deep recession. Today's challenge is worse: the supply shocks are self-imposed through trade and immigration policy.

The Fed's September cut may provide short-term relief but risks lighting an inflation fuse. The question isn't whether America can survive stagflation—it's whether it can survive one while fighting trade wars and losing foreign investor confidence.

History suggests that when governments ignore economics for politics, the reckoning comes swiftly. The 2020s may prove some 1970s lessons were never learned.

Rate cuts can grease the gears, but they can’t overcome tariffs, labor shocks, and investor flight. Unless policy changes course, stagflation isn’t a ghost from the past—it’s the next chapter.