The Fed's aggressive rate increases last year had the potential to stress the global financial system as the U.S. dollar soared, but the impact was muted by largely synchronized central bank rate hikes and other actions taken by monetary authorities to prevent widespread dollar funding problems for companies and offset the impact of weakening currencies.
"If we get to a point where there is a need for ... doing more than what's already priced in, at some point markets might start getting nervous ... Then you see a big increase in the risk premia in different asset classes including emerging markets, including the rest of the world," said International Monetary Fund chief economist Pierre-Olivier Gourinchas. "The risk of a financial tightening, a very sharp financial tightening, I think we cannot rule that out.
Some point to weakening in manufacturing, slowing consumer spending, and tightening credit, all consistent with the impact of strict monetary policy and cooling price pressures. "We expected all that to be a lot worse. It has turned out to be much more robust, much more resilient," Lagarde said. A recent improvement in productivity, for example, could explain how inflation continues falling even as growth remains strong.