The Bank for International Settlements (BIS), the global umbrella organization for central banks, has issued its first public warning regarding the economic and financial risks associated with U.S. President Donald Trump’s trade policies, deregulation plans, and fiscal strategies.
Speaking in Mexico City, BIS General Manager Agustín Carstens underscored the uncertainties surrounding U.S. trade policy, fiscal direction, regulatory changes, and geopolitical shifts, all of which he said could significantly impact global economic growth and financial stability.
A Cloud of Uncertainty Over the Global Economy
Carstens, the former Governor of the Bank of Mexico, emphasized that the Trump administration’s unpredictability could influence central banks in multiple ways. He pointed to ongoing trade tensions, particularly with China, Mexico, and Canada, as a major area of concern, warning that such uncertainty is likely to discourage business investment and household spending.
“Such pervasive policy uncertainty will affect central banks in several ways,” Carstens stated. He highlighted the potential for:
Slower economic growth, as firms delay capital expenditures and households cut back on large purchases.
Increased financial market volatility, as seen in the sharp swings in currency and asset prices in recent weeks.
Rising inflation risks, particularly in emerging markets facing currency depreciation.
With Trump’s trade war rhetoric and tariff threats intensifying, markets have already shown signs of higher volatility and capital flight from vulnerable economies. The BIS chief warned that continued instability in trade policy could deepen market uncertainty and disrupt global financial flows.
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Central Banks Face a Complex Balancing Act
Carstens urged central banks worldwide to remain focused on their core mandate—keeping inflation in check—despite the external pressures created by policy unpredictability.
The BIS plays a critical role in coordinating global financial stability efforts, managing foreign exchange reserves for central banks, and overseeing the Basel Committee on Banking Supervision, which sets key international regulatory standards.
A significant concern is that Trump’s re-election could further dismantle global financial regulatory frameworks, particularly in Europe. The fear is that this could lead to a “race to the bottom” in financial supervision, as countries compete to relax banking and financial regulations to attract capital.
The Dangers of Looser Fiscal Policies and Rising Debt
Beyond trade and regulation, expansive fiscal policies and rising government debt remain key vulnerabilities. Carstens warned that increased government spending under Trump—combined with corporate tax cuts and relaxed financial oversight—could contribute to:
Higher inflation, particularly if government deficits expand unchecked.
Exchange rate instability, as debt levels rise and currency markets react to fiscal uncertainty.
Financial instability, should there be a sudden repricing of public debt, triggering market disruptions.
"In the extreme," Carstens cautioned, "an abrupt repricing of public debt could put financial stability at risk."
A Growing Divide in Global Interest Rate Policies
Another concern is the widening gap between U.S. interest rates and those of other major economies. With stronger U.S. economic growth relative to other regions, Carstens warned that:
The Federal Reserve may continue raising interest rates, further widening the monetary policy gap with central banks in Europe, Japan, and emerging markets.
This could trigger capital outflows from emerging economies, destabilizing their currencies.
Global financial conditions could become more fragmented, as central banks adjust their policies to cope with varying economic pressures.
"Economic growth in the United States has been much stronger than in much of the rest of the world of late," Carstens noted. "Should this continue, we could see greater divergence in central bank policy settings, impacting capital flows, exchange rates, and overall financial stability."
The Road Ahead: Managing Risks in an Uncertain World
As Trump’s policies continue to reshape global trade and finance, central banks and policymakers will need to carefully navigate the resulting risks. While some U.S. businesses and investors may benefit from deregulation and tax cuts, the broader global economic system faces heightened volatility.
The BIS’s warning highlights the urgent need for financial institutions and governments worldwide to prepare for further shocks—whether from trade wars, fiscal shifts, or monetary policy divergence.
How central banks respond to these challenges in the coming months will be crucial in determining the stability of the global financial system in the Trump era and beyond.
