Earthquake in Japan. Unrest in the oil-producing Arab world. Sovereign-debt strains in Europe. Inflation in China.
The expanding list of global economic troublespots will give the U.S. Federal Reserve even more reason to stay in wait-and-see mode at its policy-setting meeting on Tuesday.
Figuring out how these assorted risks might affect the U.S. economy is tricky. Take rising oil prices, for example. They pose both an inflationary threat and a risk to consumption and economic growth — problems that pull the Fed in opposite policy directions.
As for the earthquake, economists’ best guess is that it will hold back Japan’s already sluggish economic output in the short term, although the global impact looks modest.
The severity of the economic damage will depend on how long it takes to restore normal power, a prerequisite for the rebuilding efforts that should provide some economic lift.
“The Japanese economy is now likely to take longer than we expected to exit its current lull,” economists at Nomura wrote in a note to clients.
Harm Bandholz, chief U.S. economist at UniCredit Research in New York, said the net effect of all these global trouble zones was “pointing toward a stagflation scenario” but so far, the implications for the U.S. economy looked minor.
“Therefore, the Fed will probably sit back and watch what’s going on,” Bandholz said.
Absent the global strains, the Fed might be thinking very differently about its policy stance. The unemployment rate has dropped by almost a full percentage point over the past three months, surveys show manufacturing and services activity strengthening and consumer spending has picked up.
Barclays Capital economist Troy Davig expects the Fed’s policy statement to sound a bit more upbeat.
“For example, the statement could acknowledge improvement in the labor market by describing progress toward their objectives as ‘slow’, instead of the ‘disappointingly slow’ description used in prior statements,” Davig said.