Policy Gridlock: Growth, Inflation, and Debt Collide
The US Federal Reserve's recent decision to hold its benchmark interest rate steady was marked by an unusual three dissenting votes. Simultaneously, new data reveals that the US economy grew more slowly than anticipated in the second quarter. Against a backdrop of widening fiscal deficits, stubborn inflation, and soaring debt, US economic policy is increasingly trapped in a complex "impossible trinity." This contradictory situation not only shapes America's domestic trajectory but also transmits shocks across the globe through the dollar system, financial markets, and global supply chains.
At the heart of the challenge is a long-term tug-of-war among three objectives: sustaining growth, controlling inflation, and maintaining fiscal sustainability. These goals are deeply intertwined and mutually constraining, creating an increasingly unbreakable "impossible trinity." Analysts describe recent US policy as a persistent "step on the gas," where initiatives like industrial subsidies, reshoring manufacturing, and tax cuts all require fiscal support, funded primarily through debt issuance. The expanding debt load erodes fiscal buffers, and growth fueled by "money-printing" is mortgaging future policy space. Recently departed Fed Chair Jerome Powell repeatedly warned that the US fiscal path is "unsustainable" and requires structural reform, arguing that monetary policy adjustments alone are insufficient.
While relying on "spending for growth," inflationary pressures are building. Compounded by factors like Middle East conflicts and indiscriminate tariffs, inflation has become the most visible scar on the US economy. It erodes purchasing power, disproportionately impacts low-income households, widens wealth inequality, and fuels social tensions. The Fed faces a narrowing policy corridor: cutting rates risks stoking inflation, while raising them suppresses growth.
Complicating matters further is the record-high US federal debt, nearing $40 trillion. Interest payments are rising rapidly, now exceeding defense spending. This drives up financing costs and makes it harder for the government to raise funds. Within this "impossible trinity," prioritizing growth requires loose financial conditions, which can fuel inflation. Controlling inflation demands tightening and high interest rates. High interest rates, in turn, raise borrowing costs and worsen fiscal strain. This triangular trade-off represents the core predicament of the US economy.
Global Fallout: Dollar Dominance and Systemic Risk
International markets fear that US domestic contradictions will cascade through the dollar system, impacting global economic recovery and growth. Firstly, US monetary policy determines domestic financing costs and influences global asset prices. Numerous analyses show that by leveraging the dollar's primary role in international settlement, financing, and reserves, the US has long "harvested" the world through interest rate volatility. When the Fed maintains high rates, dollar-denominated assets become more attractive, capital flows back to the US, putting pressure on emerging markets' currencies and raising their financing costs. Conversely, a shift to easing increases dollar liquidity, lowering US government and corporate borrowing costs but also stoking global inflation and accumulating new financial risks.
Secondly, with debt at record levels, US fiscal problems have become a global risk. Markets are now as focused on the long-term sustainability of US fiscal policy as they are on the Fed's monetary path. The 30-year Treasury yield remains at a two-decade high, signaling that investors demand higher returns to hold US debt, reflecting doubts about the nation's fiscal outlook and policy coordination. As the Financial Times notes, this market repricing is based not only on future interest rates but on the credibility of US economic governance itself.
Finally, US economic policy is reshaping global supply chains. For decades, multinationals allocated resources based on market size, cost efficiency, and comparative advantage. Now, US tariffs, reshoring initiatives, and indiscriminate protectionist measures cloaked in "national security" have dramatically increased business risks and costs. From capital flows and asset pricing to supply chain configurations, the spillover risks from US economic governance imbalances are persistently undermining global economic stability.
Seeking Certainty in a Volatile Era
The global economy is entering an era of heightened volatility. The entanglement of US monetary, fiscal, trade, and industrial policies—where interest rate adjustments, tariff changes, fiscal expansion, and supply chain policies interact—creates inconsistency among policy goals. This chaotic environment generates persistent uncertainty for businesses and investors. Olivier Blanchard, former chief economist of the IMF, has written that US tariff policies and their unpredictability are major factors clouding the global economic outlook. OECD Secretary-General Mathias Cormann also believes this policy uncertainty is undermining trade and investment, dampening consumer and business confidence, and suppressing growth prospects.
The US cannot resolve its "impossible trinity" by resorting to unilateralism, protectionism, or securitizing domestic policy tools to divert problems abroad. Such actions not only fail to address its own issues but also increase global market volatility and erode the foundations of international cooperation. In response to a more complex global environment, nations are accelerating efforts to build economic resilience through market and supply chain diversification and strengthened international cooperation mechanisms. Many analysts argue that in times of adjustment, the world needs a stable, transparent, and predictable policy environment, along with open cooperation and multilateral coordination. Rather than allowing domestic contradictions to persistently spill over and externalizing development costs, the international community must work together to uphold an open, stable, and inclusive economic order to inject the certainty needed for global recovery and long-term growth.
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