Worry spreads, Wall Street begins to worry that "stagflation" is coming back to America.

A series of recent data released in the United States shows that inflation is rising, and economic activity is slowing down, sparking concerns of stagflation in the market. After a strong holiday season, consumer spending in the United States in January saw the largest drop in nearly four years. Americans are becoming increasingly pessimistic about the economic outlook, with businesses warning of price increases following the Trump administration's aggressive tariff policies. Meanwhile, the U.S. financial markets also reacted this week, with cross-asset anxiety volatility, reflected in bond gains and stock declines, as well as a drop in risk assets such as Bitcoin. Although economists warn against giving too much weight to data from just one month, especially when factors such as cold weather are at play, if the risks of stagflation become a reality in the coming months, the Federal Reserve will face a difficult choice of whether to support the labor market or end the years-long battle against inflation. Chief economist at EY Gregory Daco said, "The scent of stagflation is in the air. But we're not quite there yet. Recent developments, particularly over the past week, show that confidence indicators are weakening, spending is weakening, and concerns about inflationat least inflation expectationsare rising." The deteriorating mood is mainly due to President Trump's economic agenda. This includes imposing punitive tariffs on the United States' largest trading partners and pledging significant cuts in public spending, which has led to layoffs of federal government employees. So far, the most worrying signals come from surveys on expectations and sentiment. The Consumer Confidence Index in February saw the largest drop in nearly four years, reflecting a general decline across age groups and income levels. Inflation expectations for the next year have risen to the highest level since 2023, reflecting recent increases in egg costs and price hikes due to tariffs planned by Trump. Meanwhile, dragged down by the services sector, the pace of business expansion this month was the slowest since September 2023, and the decline in retail sales in January was the largest in nearly two years. The Atlanta Fed's latest GDPNow forecast shows that U.S. economic activity in the first quarter is contractingalthough early estimates suggest that there may be fluctuations in the coming months. Barclays Bank's global research chief Ajay Rajadhyaksha said, "If consumer confidence declines, at some point you're going to start worrying about actual consumption being the next issue." Businesses of all sizes are also issuing warnings about the future. Ford Motor Company CEO Jim Farley said that imposing 25% tariffs on Canada and Mexico would "poke a hole" in the U.S. auto industry. Mexican barbecue warnings have been raised about possible tariffs on products like avocados and limes. At the same time, smaller businesses report freezing expansion plans, raising prices, and worrying about their profits. According to a survey, nearly 60% of U.S. adults expect Trump's tariffs to lead to price increases. This aligns with Arin Schultz, Chief Growth Officer of Naturepedic, a company in Cleveland, Ohio that manufactures organic mattress toppers. Due to strong consumer demand, the company just had its best year yet, but new tariffs on raw materials sourced from overseas will have an impact. His request to the new administration is to remove tariffs on materials that cannot be produced domestically in the U.S. Schultz said, "We source quite a few components that aren't made in the U.S. [...] Even so, I think domestic sourcing costs will push our costs higher." Impact of the Federal Reserve U.S. Treasury yields have fallen significantly from their peak on January 20th when President Trump took office, as bond investors begin to digest the shift from the Federal Reserve's excessive concerns about inflation to more concerns about economic growth. Federal Reserve officials are beginning to acknowledge that economic growth may slow down even when inflation remains high. This has long been a dilemma for central bank officials seeking to control prices and maximize employment. These two objectives are in conflict: lowering interest rates to support the labor market while risking inflation. However, maintaining high rates to suppress price increases could lead to an economic downturn. Drawing from history, the Federal Reserve will take proactive action to control prices and future inflation expectations. In the 1970s and 1980s, this meant raising rates to astonishingly high levels, which in turn raised the unemployment rate, causing much economic hardship. This time, the Federal Reserve has significantly cooled inflation without triggering an economic downturn, largely due to consistently low inflation expectations. As rates rise and inflation fails to return to target levels, the Federal Reserve may be forced to keep borrowing costs high even if the economy weakens. Chief economist at PwC Diane Swonk said, "Their response to the last hike may have been slow, but stagflation is a whole other matter for the Fed. They can't allow that to happen." Trump has promised that his combination of tax cuts, deregulation, and increased tariffs will spark an investment boom across the economy. White House Economic Adviser Council Chairman Stephen Miran, nominated by Trump, told members of Congress on Thursday that even with high tariffs, the U.S. can have a "stunning economy." But for now, businesses are feeling anxious. J.D. Ewing, operator of Pennsylvania office furniture wholesaler COE Distribution, said, "If our prices go up, our customers' prices go up. It's important to understand that. If it's a blunt implementation, there's no choice, costs will go up for everyone." Financial Market Anxiety Volatility in the United States The anxiety triggered by the latest economic reports has spread throughout the market. Despite a late rebound on Friday boosting the S&P 500 index, investor sentiment has been deteriorating, with mild inflation reports still issuing warnings about consumer spending. As a result, U.S. Treasury bonds have had their strongest start to a year since the crisis erupted in early 2020, while the stock market has almost wiped out its gains from 2025. The stock market saw a significant rebound on Friday, narrowing down the consecutive secondThe drop in Zhou's rate is a bright spot during the stock market volatility period. Now, with the disappearance of the so-called Trump trade excitement, large fund managers such as Manulife Asset Management and Penn Mutual Asset Management have been reducing their stock positions and increasing their bond exposure.Nathan Thooft of Manulife Investment Management said, "If consumer confidence significantly weakens and companies retract growth plans, deteriorating economic growth will become a major obstacle. There is almost no room for policy mistakes." February was a microcosm of cross-asset differentiation. A long-term government bond index rose by 5.3%, while an ETF tracking US large-cap stocks fell by 1.3%; this is the largest performance gap since June 2022. More and more people are worried that threats of tariffs, stubborn Fed policies, or tightening consumers are putting pressure on the growth engine of the United States, leading to a risk-off sentiment. Even though there was a sudden rebound on Friday (likely stimulated by constructive tariff news), the Nasdaq 100 index still plunged by over 3%, marking the largest weekly drop this year, while the S&P 500 index fell by about 1% this week. Bitcoin fell to its lowest level since early November last year, dropping over 20% from its all-time high. The 10-year US Treasury bond yield approached 4.8% in January, and is now near 4.2%. Wall Street's "fear gauge" - the VIX index measuring stock volatility - and similar credit volatility indicators are approaching their highest levels since 2025. Citigroup's data shows that the outlook for the US economy is becoming increasingly bleak, with the gap between actual data and forecasts reaching its lowest level in seven months. Consumer confidence has dropped to its lowest level since 2021, personal spending unexpectedly decreased, and data from the US real estate market in the past 10 days has fallen short of expectations. The Atlanta Fed's forecast on Friday showed that US GDP for this quarter could decline by an annual rate of 1.5%, a significant drop from the previously expected 2.3% growth. Despite the rapid market response, some believe this is short-sighted, especially considering that economic growth and inflation have been rapidly alternating. Cayla Seder, a macro multi-asset strategist at Daofu Global Markets, said that many bad economic news appeared in survey reports. She said, "It's still too early to announce a serious downturn in economic expansion, as the income growth rate is 0.9%, the unemployment rate is hovering around 4%, and we are still seeing strong overall consumption, even though favorable factors are diminishing." Nevertheless, market sentiment has been rapidly deteriorating, given how much wealth in the US is held in risky assets, market sentiment itself is a potential economic stimulus factor. A survey by the American Association of Individual Investors showed that personal investors' pessimism about the short-term outlook for the stock market has reached the third-highest level since 2009. The spread on blue-chip corporate bonds has risen to its highest level in over three months. Anxiety about the upcoming deadline for US tariffs has intensified Wall Street's anxiety. The uncertainty surrounding the actual implementation of tariffs remains high as the Trump administration previously postponed and changed the deadline. According to George Cipolloni, portfolio manager at Penn Mutual Asset Management, who manages $39 billion in assets, the cautious fiscal policies of the new US government will bring greater pressure to the market. He has reduced his exposure to US stocks while increasing exposure to long-term investment-grade stocks to prepare for higher volatility. Cipolloni said, "The new administration has brought many changes, causing some panic among corporate executives and global leaders. After setting standards for extreme wasteful spending, the market may need a period of adjustment and may see significant fluctuations."