LONDON, March 10 (Reuters) - Central banks have long been the lead policy actors in world markets and economies, but they are stepping back into supporting roles as governments grab the limelight.
In less than two months, the avowedly disruptive new U.S. administration has prompted a dramatic re-casting of the global economic script, upending economic forecasts and cross-border investment flows around the world.
The sweeping trade wars Donald Trump's government has unleashed and the fracturing of decades-old U.S. political and military alliances have forced a generational shift in German and European fiscal policy, while encouraging China to step up stimulus measures to meet its restated and now ambitious 5% growth goal.
But the scale of trade uncertainty has unnerved U.S. businesses and shaken household confidence, with U.S. downturn fears amplified by the slashing of government jobs and ructions on Wall Street.
Caught in the fog, the Federal Reserve can barely make an accurate forecast for what's going to happen next week - never mind feel confident about predicting where the economy and inflation might be when any interest rate change hits home some 12 months hence.
It's a good bet the Fed will sit on its hands for a while longer while it fathoms it all out. Fed Chair Jerome Powell said as much in his speech on Friday.
But even reading incoming data has gotten a lot harder. For example, this week's inflation update will of course be watched closely, but last month's consumer prices won't shed any light on the potential impact of the proposed tariffs coming down the pike.
Even before the end of the first quarter, investors are being forced to rip up the year's plans already and a Fed likely on hold for a lot longer is not what to watch for what happens next.
"The more benign macroeconomic backdrop that investors had in mind going into 2025 has arguably been shattered," reckons AXA Investment Managers' Chris Iggo. "The U.S. administration's challenges to the global trading and security order have the potential to disrupt trade, capital flows, consumption, investment spending and government policy."
"Investors now face ambiguity over economic growth, inflation, interest rates, and long-term borrowing costs – not to mention political risk."
WHATEVER IT TAKES: FISCAL VERSION
The growing dominance of fiscal policy is even more apparent in Europe.
The European Central Bank cut interest rates again last week, while offering marginally hawkish statements about its plans as it too re-maps the shifting macroeconomic landscape.
But for financial markets, Thursday's ECB move was almost a sideshow to the dramatic fiscal changes in Germany, which announced plans for nearly a trillion euros in defense and infrastructure spending, reinforced by plans for wider European joint borrowing.
Opinions differ widely about how much further the ECB's policy rate will fall during this cycle, but it's another decent bet the central bank will hold the policy line until June at least, or until it sees how some of these fiscal plans play out.
But even if the ECB wants to stall here given the potentially huge impact of new government spending promises on domestic growth and debt, it also has to consider the implications of Trump's increasingly erratic trade threats as April's "reciprocal" U.S. tariff plans hit Europe directly.
Will the ECB see this as a reason to ease again? It almost certainly doesn't know the answer to that yet.
And, in truth, a cut here or there likely won't matter much. The combination of continental rearmament, the lifting of Berlin's self-imposed "debt brake", and the re-engineering of euro budget rules will pack a far bigger punch than any marginal tinkering in borrowing rates.
The euro certainly seems to think so. It batted away last week's rate cut, clocking its biggest weekly gain on the dollar in 16 years.
Global equity markets also paid little heed to the ECB, as the Transatlantic capital shift from pricey U.S. tech stocks to far cheaper European industrial and defence sectors continued to unfold.
DRIVING SEAT
It's not that central banks no longer have power to move markets by changing the cost of money. It's just that calculations about what such actions would mean for economies and markets are now much more heavily influenced by fiscal policy forces.
All this may keep monetary policymakers in the wings for much of the year, relegating their prognostications to slightly "beside the point" in the process.
"Fiscal policies will be the primary driver of almost everything that matters to investors," currency fund manager Stephen Jen said last week. "Central banks will only react to these policies and can no longer dictate where the markets go. Bond yields will drive equities and currencies."
The "be all and end all" for market thinking for decades, central banks suddenly - and perhaps deliberately - figure well down the credit roll.
By Mike Dolan; Editing by David Holmes
