Wall Street is talking about stagflation, a combination of stagnant growth and elevated inflation. The real risk is not just that stagflation could arrive, but that the usual policy tools to fight it won't be in play.

The big picture: The president and his advisers have been blasé about the risk of a growth slump or new inflation spike, believing that it's necessary to jolt the economy into a better long-term condition.

• The Fed will be constrained in responding to any economic weakening with rate cuts because inflation has already been well above its target for four straight years.
• That all means the usual Washington cavalry may not arrive at the first sign of economic trouble.

State of play: Global investors are becoming wary of the possibility that President Trump will eventually follow through on his pledge of large, across-the-board tariffs on many of the largest U.S. trading partners. That has fueled an 8% drop in the S&P 500 since Feb. 19.

• Trade wars amount to a negative supply shock, simultaneously reducing growth prospects and increasing price pressures.
• Google searches for the term "stagflation" are among the highest they've ever been, per Google Trends, surpassed only in three episodes (2008, 2022, and briefly last year).

Between the lines: Usually, if the economy starts to worsen, help from the government — fiscal stimulus action and interest rate cuts from the Fed — can be counted on to buffer the impact.

• But Trump administration officials appear willing to tolerate some economic dislocation as the price of their sweeping policy agenda.

What they're saying: Trump, asked about recession risk yesterday in a Fox interview, acknowledged a "period of transition" from his policies.

• Treasury Secretary Scott Bessent referred to a period of "detox" for the economy as it is weaned from public spending. "[C]ould we be seeing that this economy that we inherited starting to roll a bit? Sure," he said Friday on CNBC.

Reality check: If the economy really does start to deteriorate in a meaningful way, it would be unsurprising if we saw a pivot from the White House. Stock market crashes and spikes in unemployment have a way of getting any president's attention.

• Trump economic advisers in early March 2020 dismissed the need for fiscal action to deal with the pandemic fallout; the president would sign a $2.2 trillion relief act at the end of that very month.

Stagflation is always challenging for a central bank, as the "stag" part and the "flation" part point policy in opposite directions. But that is doubly so at this moment, when inflation has already been running hot for years.

• In discussing how the Fed will respond to tariff-induced disruption, chair Jerome Powell said Friday that "you want to remember the current context, which is we, we came off of very high inflation, and we haven't fully returned to 2% on [a] sustainable basis."

The bottom line: The risk is not that Washington won't respond at all if stagflation rears its head. It's that the response will be slower and more restrained than we've become accustomed to.

A closely watched GDP estimate got a ton of attention in the last couple of weeks as it suggested the U.S. economy is currently in a steep contraction. Not so fast: The tool's creator says an unusual trade dynamic broke the model.

Why it matters: Unprecedented economic events make go-to indicators less reliable, as was the case five years ago when the pandemic hit.

• Patrick Higgins, the economist behind the Atlanta Fed's GDPNow, said the drastically lower estimate was "unprecedented in one respect" — though on a much smaller scale than the global pandemic, of course.

Zoom in: In a LinkedIn post, Higgins put out a new "gold adjusted" GDP estimate — one that excludes gold from imports and exports — of +0.4% in the first quarter.

• GDPNow does not exclude gold imports, but the official GDP calculation does. Usually, that factor might not mean much, except gold imports soared in January with an increase of $33 billion — more than double the increase in December, Higgins noted, citing trade data released last week.
• It accounted for nearly 60% of the widening of the goods trade deficit, Higgins said. Traders have been front-loading imports of gold to position it in the U.S., in case Trump moves to slap tariffs on the commodity.

The bottom line: The "gold adjusted" GDPNow — which the Atlanta Fed will include in some future updates — flips the estimate from contractionary to flat, which is still not very reassuring.

• As we noted last week, there is good reason to believe that estimate will move around more as two months' worth of data comes in that might offset any categories dragging the estimate down.