Tariffs Raise the Specter of Stagflation: Three Macro Scenarios
- We provide multi-asset-class investors with a framework to assess the portfolio impacts of three macroeconomic scenarios — including stagflation and recession — that could arise from escalating trade tensions.
- Stagflation is especially concerning, because the Federal Reserve would have limited ability to stimulate growth by lowering rates. In such scenarios, bonds and equities tend to decline simultaneously.
- In our most adverse scenario — a recession combined with rising inflation — the U.S. equity market could decline by nearly 35% from levels prior to the tariff announcement.
- In the stagflation scenario, economic growth falls to 0% while inflation rises by 200 basis points, amid supply shocks and trade fragmentation. To combat high inflation, the central bank raises rates, which weighs on growth longer term.
- The recession scenario assumes an economic contraction of 3%, while slowing demand reduces inflationary pressures. The Federal Reserve has room to cut interest rates, and growth recovers faster than in the stagflation scenario.
- Our worst-case scenario combines a recession and high inflation. Despite a sharp economic contraction, persistent trade disruptions sustain inflationary pressures and push interest rates up, like the oil-price shocks during the stagflation of the 1970s, when recessions coincided with high inflation.[3]


1 Matthew Boesler, “Economists Slash US Growth, Boost Inflation Forecasts on Tariffs,” Bloomberg, April 4, 2024.
2 These scenarios are not forecasts but hypothetical scenarios. We used the MSCI Macro-Finance Model to translate macroeconomic assumptions to U.S. market impact. You can find the scenarios here: stagflation, recession and recession with high inflation.
3 Bill Dudley, “Stagflation Is Now America's Best-Case Scenario,” Bloomberg, April 7, 2025.
4 The results are generated by using model correlations to propagate shocks to the portfolios, using MSCI's BarraOne®. MSCI clients can download the correlated BarraOne stress test and RiskMetrics® RiskManager® stress test. Treasury inflation-protected securities (TIPS) are represented by the iBoxx TIPS Inflation-Linked Index provided by S&P Dow Jones Indices. U.S. Treasurys, equities and corporate bonds are represented by MSCI indexes. Private equity is represented by model portfolios. U.S. real estate is represented by the MSCI/PREA U.S. AFOE Quarterly Property Fund Index. The composite portfolio is 50% global equities (35% public and 15% private), 10% U.S. Treasurys, 10% TIPS, 10% U.S. investment-grade bonds, 10% U.S. high-yield bonds and 10% U.S. real estate.
5 A reversal scenario — reflecting up-to-date market data — can be implemented by using the by-date stress-testing functionality as described on the support site's pages: BarraOne stress test and RiskMetrics® RiskManager® stress test.
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