It is in a president’s interest to ensure that the economy and the stock market are strong. Yet the Trump administration has been doing just the opposite.
The mood in the markets has been upbeat this week, largely because the president and his advisers softened their stances, rolling back some of their threats toward both China and the Federal Reserve. Periods of relative calm like this last one have been a relief, but they haven’t lasted long, for good reasons.
Start with President Trump’s imposition of tariffs on countries around the world, especially his decision to start a trade war with China. Then, consider his repeated verbal attacks on the Fed and its chair, Jerome H. Powell, which have threatened the independence of the central bank.
Add the weakening and wholesale dismantling of a host of important government agencies, the defunding of universities and the open consideration of policies that could dislodge the U.S. dollar and Treasury bonds from their place at the center of world finance. There’s plenty more.
Fundamentally, investors and business executives are jittery, and economists have profound concerns about the potential damage being done to the United States as well as countries around the world.
I’ve had an eerie feeling about what we’ve been seeing. It’s like watching a hurricane forming out in the ocean, one that could head right to New York City. Preparing for weather events like this is important. But this slow-moving storm is something different. It is self-inflicted — started by the man in the Oval Office, who has the power to limit the damage, if no longer to avoid it entirely.
The Economic Effect
Economists have scrambled to comprehend the logic behind the Trump policies, many of which seem self-destructive. For example, the Trump tariffs, as proposed, would induce a supply shock on the United States roughly equal to a doubling of the price of oil, the Peterson Institute for International Economics estimated.
Oil price shocks have set off runaway inflation and often led to recessions. A shock of this magnitude is “something every government of the United States has tried to resist, and it’s hard to imagine being something that anyone would willingly embrace,” Lawrence Summers, a former U.S. Treasury secretary, said this month.
He added that the Trump tariff policies are “the biggest invitation to stagflation that we’ve had since the 1970s.”
Stagflation is a combination of high inflation and slow growth. Yet tariffs on the scale proposed by the president could bring it about — simultaneously raising prices while discouraging consumption and investment, and throwing people out of work.
On the growth front, the outlook is already much dimmer than it was before Inauguration Day in January. The International Monetary Fund said on Tuesday that the Trump-initiated tariff wars would slow economic growth around the world to 2.8 percent this year from 3.3 percent in 2024; in the United States, it would drop to 1.8 percent in 2025, down from 2.8 percent.
Tariffs are a tax on consumers. Based on the tariffs in place or proposed through April 15, U.S. consumers “face an overall average effective tariff rate of 28 percent, the highest since 1901,” according to the Budget Lab at Yale, a nonpartisan research center.
This year, the tariffs would increase prices for the average household by 3 percent, the center said, which is “the equivalent of an average per household consumer loss of $4,900.” But many people will cut back spending or substitute cheaper products, reducing their costs. Even so, “the post-substitution price increase settles at 1.6 percent, a $2,600 loss per household,” the Budget Lab said.
There will be a toll on jobs, too. Because of the tariffs, the unemployment rate by the end of this year is expected to be 0.6 percentage points higher, the researchers said, and there could be 770,000 fewer people on payrolls.
But this is all still fluid. After imposing tariffs unilaterally — and, in some cases, using statutes in novel and questionable ways, which are being contested in the courts — Mr. Trump invited countries around the world to engage in negotiations. One day next month, he could well declare that the trade talks have been satisfactory and that the tariffs will come down.
At the moment, however, the situation is fraught, particularly between the United States and China. The United States has imposed tariffs of 145 percent on China, which has responded with 125 percent tariffs on U.S. goods. Both countries have additional restrictions on specific items. Unless a rapprochement is reached soon, U.S.-China trade will be sharply curtailed.
On Tuesday, Scott Bessent, the Treasury secretary, and Mr. Trump said the trade war would de-escalate once negotiations started. But Chinese spokesmen in Beijing on Thursday said there would be no talks unless the United States treated China with respect and dignity.
The president clearly hopes for a new trade deal with China. Yet he remains a “tariff man” who sees more harm than good in “globalization,” the decades-long knitting together of world economies. Countries around the globe have, understandably, begun to rethink their trade routes, investments and loyalties, doing what they can to insulate themselves against the stress emanating from the United States.
The Markets
On a flimsy reed, the U.S. stock market built a modest rally this past week. But U.S. stocks are still down sharply this year — while the stock markets in many countries in Europe and Latin America are up by double digits.
U.S. bonds have been steadier, though yields remain stubbornly high. One reason is the assessment in the bond market that the tariffs could pull the Fed into another bout with inflation. The Consumer Price Index stood at a 2.4 percent annual rate in March. It’s been well above the Fed’s 2 percent target since 2021.
On Wednesday, the Fed’s Beige Book, its survey of conditions across the nation, said that because of the tariffs, “uncertainty around international trade policy was pervasive.” Fed policymakers meet next month, but until the outlook is clearer, the central bank is unlikely to take action on interest rates.
A Fed rate cut would probably cheer the stock market and stimulate the economy..
But Fed independence may be prized even more. Economists have found that when central banks are well fortified against attacks by politicians, monetary policy tends to be steadier and economies stronger.
So on Wednesday, when the president said that his many comments berating Mr. Powell had been misinterpreted, and that he actually had “no intention” of trying to shorten Mr. Powell’s tenure as Fed chairman, the stock market rallied. Even at the cost of higher interest rates, it seemed that traders were pleased that the Fed’s role as market guardian would remain intact.
The Outlook
Assessing where the markets go from here is especially difficult because much of it depends on the president. He has sometimes muted his voice but has not disguised his disdain for Mr. Powell. And while he has backpedaled periodically about tariffs, he has never renounced his commitment to raising them.
That leaves the markets in a quandary because the president is breaking with decades of tradition and economic teaching. A vast majority of economists view tariffs as ill advised, and see the president’s focus on the country-by-country balance of trade as baffling.
Insisting that all trade everywhere needs to be balanced, and that imbalances are inherently “unfair,” as the president has done, is like insisting that there’s something wrong with spending money at the supermarket and being paid by your employer. Your individual accounts are, arguably, out of balance: You’re spending money with one and getting money from the other. But who cares? It’s hard to see anything unfair about that.
On a national scale, the United States buys things it wants or needs and cannot grow or make domestically at a reasonable price, like bananas or iPhones. It pays for them in a variety of ways — with exports of machinery or software, music or movies, or through borrowing or investment income, and obtains immense benefits through this exchange.
Imposing some specific tariffs to protect national security may make sense, as does taking steps to restore prosperity to domestic regions that have suffered when local industries have been unable to compete with foreign companies. But imposing the highest tariffs in more than a century all over the world? The consensus is that this approach is unwise.
No wonder the markets respond favorably at hints that the tariffs will be negotiated downward.
Yet uncertainty about the Trump policies is rife in financial circles.
It’s beginning to show up in corporate earnings calls, with chief executives lowering their projections for the next year — or indicating they are less certain about them. Stock analysts have become nervous. They have downgraded S&P 500 earnings and revenues sharply, according to FactSet, an independent financial research service. CBS News reported that Target and Walmart have warned the president that his tariff policy is disrupting supply chains and could leave store shelves bare in the weeks ahead.
Perceptions of market risk have increased. As a multiple of earnings, stock prices have fallen. The sense that owning U.S. Treasuries has become riskier may be a reason for higher bond yields. When investments seem riskier, you want a better price, or a better yield, for bearing that risk. This is a weight on the markets, and while it may be lifted temporarily by emollient words, it remains a heavy burden.
Perhaps the most hopeful augury for the markets is that the first year of a president’s term is often the worst for stocks and bonds.
The theory of the presidential cycle goes like this: Fresh from an election victory, and far from the next one, it’s an auspicious time for a politician to take tough action. If you are going to set off a recession, do it early in your first year in office because there’s time to recover. Soon, though, with midterm elections in sight, it will be time to stimulate the economy and the markets.
That realization might bring about a shift in administration policy.
But I wouldn’t go too far with this.
If Mr. Trump were to abandon all the tariffs he has proposed — and there is no sign of that actually happening — the problems he has already introduced wouldn’t all vanish.
By tearing asunder the fabric of international relations, he has raised enduring questions about the validity of U.S. promises in trade and diplomacy, and added deep uncertainty to the planning of businesses, investors and workers around the world.
He can improve the situation, and I certainly hope he does, but it’s too late to pretend that none of this has happened.
