The William R. Rhodes Center for International Economics and Finance

When global uncertainty increases, emerging markets are typically the most exposed. Historically, tighter US monetary policy has led to capital outflows, currency depreciation, and tightening financial conditions in emerging markets. This column examines how domestic vulnerabilities shape the transmission of US monetary tightening across countries. It shows that many emerging markets avoided widespread financial crises over the 2022-2023 tightening cycle due to improved monetary policy credibility and reduced foreign-exchange vulnerabilities. In a world of rising uncertainty, stronger domestic institutions are among the most effective forms of economic insurance.

In today’s interconnected global economy, geopolitical shocks cascade through trade, production, and financial networks that were built for efficiency, not resilience. As disruptions hit critical supply chains, temporary price spikes can evolve into sustained inflationary pressures, raising the risk of stagflation.

The United States’ unique economic advantages – deep financial markets, a strong institutional framework, and the world's dominant reserve currency – should not be mistaken for invincibility. In fact, markets are already pricing US policy uncertainty the same way they price that of countries that do not have a reserve currency.

In today’s interconnected global economy, tariffs produce outcomes that are very different from what traditional economic models would predict. Rather than causing only limited and temporary distortions, tariffs can generate persistent inflation, significant output losses, and damaging international spillovers.

The US Federal Reserve’s independence is widely understood to be vital to the economy’s well-being, by insulating monetary policy from political imperatives. But, following the launch of a criminal investigation of Fed Chair Jerome Powell by President Donald Trump’s minions at the Department of Justice, it is hanging on by a thread.

From attacks on the Federal Reserve's independence to high and unpredictable tariffs, Donald Trump has pursued a slew of misguided policies that threaten to fuel stagflation, trigger financial instability, and end US dollar dominance. Emerging-market and developing economies must take action to protect themselves.