The expanding global trade war threatens to infect the U.S. economy with a bout of “stagflation,” according to Loomis Sayles vice chairman Dan Fuss. In fact, the stream of tariff announcements, now affecting $800 billion worth of global goods, has prompted the storied fixed-income manager to dial down his outlook for economic growth around the world over the next two years. Four months ago, Fuss was upbeat and optimistic.

For most Americans, stagflation is a distant memory, one that caused inflation to accelerate and growth to slow half a century ago. It first surfaced in the late 1960s, initially in a mild way. But it eventually wreaked havoc on the U.S. economy characterized by three-hour gasoline lines in the late 1970s. Ultimately, inflation became so pervasive that Federal Reserve Board Chairman Paul Volcker felt compelled to raise interest rates so aggressively in 1981 that he triggered a nasty recession with double-digit unemployment.

If there is any good news, it’s that any incipient stagflation is likely to look more akin to the late 1960s than the corrosive 1970s variety, Fuss believes. He also doesn’t see an outright recession on the horizon. However, he doesn’t rule out the possibility of a “growth” recession that occurs when the economy slows, the unemployment rate rises and real sales growth deteriorates but nominal GDP growth remains marginally in positive territory.

Other observers like Jim Paulsen of The Leuthold Group also see the prospect of stagflation on the rise. Only a few like David Rosenberg of Gluskin Sheff are predicting an outright U.S. recession in the next 12 months.

Whatever happens, central bankers are taking notice. “Regional Fed governors are saying maybe our economic forecasts were all wet” with new trade restrictions emerging, Fuss says. What concerns him is that the Fed models only look at the first- and second-order effects of tariffs, not the third- and fourth-order side effects as they ripple through the interconnected global supply chain.

Furthermore, both of the Fed’s mandates -- fighting inflation and promoting unemployment -- address domestic economic issues, Fuss notes. That leaves it with a limited arsenal to fight the side effects of a trade war.

All this comes at a time when many were hoping the U.S. economy was emerging from a decade of secular stagnation. Four months ago, Fuss thought the economy would continue growing at a brisk clip into 2020, taking the 10-year Treasury to the 4 percent area. But he qualified that prediction with the caveat that it assumed there would be no major geopolitical shocks.

Now he’s thinking that the “geopolitical situation is far worse” than [it was] four months ago, as is the domestic political environment. “I’m guessing the Fed won’t be as aggressive,” he says. “The bottom line is a much slower economy.”

The impact on Main Street has just begun. While the U.S. economy has seen some great jobs reports in recent months, some employers may get nervous about uncertainty as successive rounds of tariffs rolled out.

Companies like GM and Harley Davidson are warning about layoffs or planning to shift production abroad. Mid-Continent Nail Corp., the nation’s largest nail manufacturer, says if it doesn’t receive an exemption from paying tariffs on steel from Mexico, it will face two choices: closing shop or moving its operations to Mexico.

Even without a recession, costs per unit of manufactured goods will increase if production contracts as tariffs ripple through the global supply chain. Then unit prices are likely to follow.

So “the consumer who just got laid off will have to pay more [for certain products],” Fuss says. “Let’s just say something like this is possible.”

That’s part of the reason why the Fed may be asking if it “really wants to raise rates” or shrink its balance sheet. The central bank also may be wondering how it will finance an increasingly heavy debt financing schedule going forward.

Taxes on repatriated corporate cash overseas have enabled the U.S. Treasury to take in more revenues than anticipated, Fuss notes. But that’s a one-time phenomenon likely to run out soon, so there will be more Treasurys to sell.

How will countries from China to Canada to Europe feel about buying our debt after we’ve antagonized them? If the trade war causes their economies to slow down, the reality is that they will have less funds to purchase Treasurys even if they want to buy the greenback.

Right now, Fuss says the demand for 30-year Treasurys is very strong, thanks to defined benefit plans seeking assets to match against pension liabilities. So-called 30-year long bonds are stripped, or divided into interest-only and principal-only hybrid securities, almost as quickly as they are issued. But pension plans also are declining in number and significance as more companies and government entities switch to defined contribution plans.

Fuss believes the Fed will stick to its plan and raise the Fed funds rates again in September. In this type of environment, investors could flock to 10-year Treasurys. Fed governors want to get interest rates higher so small banks can attract deposits and so they have ammunition to fight the next recession.

But after September, the outlook is not so clear. “How this all works out I don’t know,” he says. “But I don’t like the outlook.”

It’s always possible that America’s mercurial president could win a few concessions and declare victory. That’s what the stock market appears to be saying. America, Canada and Mexico account for only 7 percent of the world’s population and 29 percent of global GDP, so the North American economic free-trade zone is well worth protecting.

Unfortunately, the stand-off with China looks far more intractable and it‘s hard to imagine either side backing down. Grievances about China’s treatment of intellectual property are legitimate. On the surface, it would seem China has much more to lose than America.

Viewed from China’s perspective, however, the trade war could be seen as an opportunity to double down on high-tech products and advanced manufacturing so it can compete against America, Germany and Japan for expensive durable goods by 2025 or even before then. Never let a crisis go to waste.