Slowing economic growth mixed with a bout of renewed inflation risks moving the U.S. from global overachiever to a drag on the rest of the world as foreign central banks and others confront the spillovers from President Donald Trump's fast-moving effort to rewire international trade.
With analysts in the U.S. noting the stagflationary direction of the U.S. outlook - weaker output and higher prices - central banks globally are parsing what the fallout may mean for them.
Similar warnings came from the Bank of Japan, which held its policy rate steady and signaled future moves could be shaped by how Trump's plan to blanket the world with new tariffs plays out in practice.
'UNDENIABLY GROWTH NEGATIVE'
The International Monetary Fund, which meets next month in Washington for the first time since Trump's inauguration, had previously warned of the blow a trade war could deal across the global economy. Economists see a likely recession in Canada and Mexico, which depend mightily on exports to the U.S. and have been particularly targeted by Trump, while shifts in global currency and capital flows and U.S. foreign spending are already creating sets of winners and losers.
"The proliferation of tariffs and related uncertainties raise the risk of a global hard landing. Measures of trade policy-related uncertainty have continued to soar to unprecedented heights while business surveys... now also show a loss of global growth momentum," said Ken Wattret, global economist at S&P Global Market Intelligence.
Trump has said he will follow through next month on twice-delayed plans to impose 25% levies on goods from Mexico and Canada despite a regional trade agreement negotiated in his first term, and announce a tariff "number" for other countries based on taxes they impose on U.S. goods. He has already boosted tariffs on goods coming from China and on steel and aluminum.
"Tariffs are undeniably growth negative for the global economy," said Jeffrey Schultz, head of CEEMEA economics, BNP Paribas Markets 360. Worries about stagflation in the U.S. are likely to lead to the Federal Reserve delaying rate cuts, tighter global financial conditions and "critically, a negative uncertainty shock - and I don't think any of that is particularly good news for emerging markets."
"What would you write down?" when making projections in this environment, Fed Chair Jerome Powell said after the Fed held interest rates steady on Wednesday but still projected two quarter-percentage-point cuts by year end.
That was the same view as in December despite policymakers' outlook for rising inflation, but Powell said this round of rate projections involved "frankly, a little bit of inertia" against making any change given "unusually elevated" uncertainty.
"I mean it's just... really hard to know how this is going to work out," he said.
'STAGFLATIONARY DIRECTION'
That same sort of default setting may have appeared in the Fed's growth projections, which showed growth slowing roughly to the Fed's estimated long-run trend of 1.8% and staying there through 2027 - an outcome counter to Trump's promise of a "golden age" to make up for the immediate disruption his policies are beginning to cause.
If realized, it would end what has been known as a period of U.S. "exceptionalism" following the COVID-19 pandemic.
The country skirted the Depression-style crash some feared from the health crisis, using extensive government support to keep businesses and families whole, then was able to largely tame a bout of high inflation without the recession and widespread joblessness some felt would be needed - a surprising show of resilience.
Growth has been steadily above estimates of potential, boosted by a jump in productivity that Fed officials and analysts have cheered even as they caution there's no guarantee it will continue.
The Fed's new projections show all that coming back down to earth, with new risks to what had seemed a path for the central bank to return inflation to 2% without paying much of a price in terms of lost growth or jobs.
Now that outlook has been "revised in a stagflationary direction," JP Morgan Economist Michael Feroli said after the Fed's meeting. "The statement, the (Summary of Economic Projections), the press conference, were all haunted by the specter of tariffs."
