With a sigh of relief, the financial markets welcomed earlier this month the publication of strong numbers for US job creations and the acceleration of wage growth in May. What a difference with early February, when higher-than-expected inflation and wages sparked a surge in volatility!

Of course, the reassurance provided by these robust growth statistics shows that investors are worried that the US recovery might be winding down. Several factors have nourished these fears. Recent pressures on several emerging market currencies are a stark reminder that US monetary policy has international consequences that can have a ricochet effect on the US, via a stronger dollar and declining exports. Protectionist threats are another factor. Higher import tariffs certainly give US producers an advantage, but they are also likely to boost inflation, with a negative impact on corporate earnings in some sectors and on household purchasing power. They also create uncertainty over which sectors will be hit by retaliatory measures, which hampers investment. Lastly, political uncertainty in Italy has rekindled market volatility and triggered capital flight towards safe havens, which is holding down US long-term rates and straining morale across the Atlantic.

To a certain extent, these growth fears are surprising because the factors that influence household spending are still looking upbeat (revenue growth, interest rates, household confidence and asset trends). The same can be said for the factors determining corporate investment (earnings growth, interest rates, access to financing), without overlooking tax cuts, which will give an extra boost to both households and companies alike. Moreover, Fed officials have also reiterated their confidence. Lael Brainard, a Board of Governors member, recently said that the use of production factors would increase in the months ahead because fiscal measures would stimulate growth, which has already surpassed its long-term potential. Consequently, monetary policy, which is mildly accommodating today, will eventually become slightly restrictive.

This creates a new factor to fray investors’ nerves: how will the Fed react to inflation trends? If inflation were to beat both the central bank’s target and analysts’ expectations, it would fuel fears of a more aggressive reaction from the Fed. This is a very real risk. The jobless rate is already very low, and robust growth will put even more pressure on the labour market. Monetary policy is still accommodating, albeit less than in the past, and the fiscal boost of an economy that is already operating at full speed is a harbinger of higher inflation. Lastly, steel and aluminium import tariffs will drive up prices in some sectors. Once confidence in growth prospects is fully restored, it is a safe bet that investors will switch their attention to the risks of accelerating inflation again, extending the back-and-forth movement of the pendulum. This seesawing is characteristic of a mature cycle, which is the case for the US economy considering that it has been growing since summer 2009.