Recently, the volatility of the US financial market has intensified, with major US stock indexes falling across the board in February, Treasury yields falling sharply, and at the same time, in terms of economic data, macroeconomic data continued to deteriorate, growth expectations plummeted, and inflationary pressures remained high.

Against this backdrop, markets are beginning to realize that the Trump 2.0 policy mix may not be an engine of economic growth in the traditional sense, but a potential "growth drag".

The dual challenges of consumer confidence and inflation expectations

Recently, US consumers have become more cautious, while inflation expectations have risen, which has economists wary of the risk of stagflation. In February, consumer confidence fell by the most in nearly four years, with pessimism across all age groups and income groups.

The consumer confidence index fell sharply in February, the biggest drop in nearly four years, showing widespread pessimism. At the same time, consumer spending was also weak, with January plummeting to its biggest drop in nearly four years, in stark contrast to the strong performance of the previous holiday season. Ajay, Barclays Global Research Chair "If consumer confidence continues to decline, at some point, you start to worry about whether consumption will actually be affected," Rajadhyaksha noted. ”

This is in contrast to the weakness in consumption is the rise in inflation expectations. Consumers' inflation expectations for the year ahead climbed to their highest level since 2023. Much of the deterioration in market sentiment is due to the Trump administration's economic agenda, particularly its plans to impose tariffs on major trading partners. Whether it's importing raw materials or consumer goods, tariffs can drive up costs and ultimately pass on to end prices. The rise in egg prices is only a symptom, and the underlying reason lies in the impact of tariff policies.

Gregory Darko, chief economist at EY "There's a hint of stagflation in the air, but we're not really in stagflation yet," Daco said. He further explained: "Developments, particularly over the past week, suggest that market sentiment is subduing, spending is slowing, and inflation concerns – or at least inflation expectations – are rising." ”

Uncertainty looms over the U.S. economy

Uncertainty is looming over the U.S. economy. The Atlanta Fed's GDPNow model forecasts that US GDP will shrink by 1.5% in the first quarter of 2025. At the same time, the pace of expansion of US business activity in February fell to its lowest point since September 2023 due to the poor performance of the service sector. Retail sales plummeted in January, the biggest drop in nearly two years.

Economic data is showing signs of weakness

GDP forecast: The Atlanta Fed's GDPNow model expects U.S. GDP to shrink by 1.5% in the first quarter of 2025, signaling a slowdown in economic growth.

Deceleration in business activity: The pace of business activity expansion in February fell to its lowest level since September 2023, mainly dragged down by the services sector.

Retail sales decline: Retail sales fell sharply in January, the biggest drop in nearly two years, reflecting weaker consumer spending.

Businesses are warning about the outlook for the future

In the face of these unfavorable data, companies have expressed concerns about the future prospects:

Ford Motor CEO Jim Farley Farley warned that a 25% tariff on Canada and Mexico would "hit the U.S. auto industry hard." This not only affects production costs, but also weakens the competitiveness of enterprises.

Chipotle said it was concerned about the rising cost of food products such as avocados and limes, which would directly affect its raw material procurement costs, which in turn would affect profit margins.

Small businesses are also feeling the pinch. For example:

Arin, Chief Growth Officer, Naturepedic Schultz noted that many key components cannot be produced in the U.S., and tariffs will drive up prices and eat into profits. He stressed that in this situation, it is difficult for companies to maintain their existing product pricing strategies.

Pennsylvania Furniture Wholesaler COE J.D., Head of Distributing. Ewing also said that due to rising costs, they have had to pass on some of the increased costs to consumers, which could further dampen consumer demand.

Opinion polls show public concern

According to a recent Bloomberg poll, nearly 60% of Americans expect the Trump administration's tariffs to lead to higher prices. This result shows that the public is highly vigilant about the potential negative impact of tariff policy.

The Fed is in an awkward position

At a time when the U.S. economy is at risk of stagflation, a complex situation that makes the Fed's policy choices particularly tricky. With Treasury yields falling sharply from the peak of the year hit before President Trump's inauguration on January 20, bond investors have begun to anticipate that the Fed will have to adjust its policy stance from being overly worried about inflation to focusing more on economic growth.

The twin challenges of the economy and inflation

At present, the decline in US Treasury yields reflects market concerns about a future slowdown in economic growth, while also hinting at investors' expectations that the Federal Reserve may adopt a more accommodative monetary policy to stimulate the economy. However, the reality is that while economic growth is likely to stagnate, inflation remains high. This has long plagued central bankers seeking to control prices and maximize employment – interest rate cuts, while stimulating employment, could also exacerbate inflation; Keeping interest rates high to curb rising prices could lead to a recession.

A change in the attitude of Fed officials

Fed officials have begun to acknowledge that economic growth is likely to stagnate, while inflation remains stubbornly high. This dilemma requires the Fed to weigh the pros and cons when setting policy. Diane, Chief Economist at KPMG "Stagflation is a new challenge for the Fed, and they must not allow it to take root," Swonk warned. She noted that stagflation not only threatens short-term economic stability, but can also have a negative impact on long-term economic growth.

Risks of stagflation and coping strategies

Stagflation, a phenomenon in which economic stagnation coexists with inflation, is a particularly intractable problem for central banks. Tools traditionally used to combat inflation or boost growth are often difficult to function effectively in a stagflationary environment. For example, interest rate hikes can tame inflation, but will further drag down already weak economic growth; Conversely, a cut in interest rates can stimulate economic activity, but it could push up already high prices.