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QUICK FIX
Critics of President Donald Trump’s trade agenda have warned that his introduction of punishing new tariffs will cause prices to surge, reigniting the inflation that he swore he’d crush in the White House.
But some economists say that higher prices from new levies pose a major threat to another of his signature promises: unlocking economic growth.
“To the extent that you really do have a big tariff shock, I think it’s odd to worry about the inflationary impact,” said Jason Thomas, the head of global research and investment strategy at The Carlyle Group. If the tariff is “sufficiently large, you’re likely to dent spending to an extent that — within three to six months — the Fed is more likely to cut rates than raise rates.”
In other words, tariff-related sticker shock runs the risk of hammering consumers to a point where the economy falls into a slump.
Trump insists that a policy mix of tariffs, tax cuts, deregulation and lower energy prices will unleash economic growth and Make America Wealthy Again. But consumers are still sensitive to high prices — it was the primary political vulnerability identified in a recent, favorable CBS News poll — and a trade policy-induced downturn would pose a serious peril to his agenda.
It would also create challenges for Federal Reserve Chair Jerome Powell — who is scheduled to testify at Senate Banking this morning — as he charts a course for the central bank to lower interest rates. It’s taken longer than expected for inflation to fall back in line with the Fed’s annual target of 2 percent. Investors are pricing in higher inflation in the near term — a reflection of Trump’s tariff plans — and Goldman Sachs analysts have told clients that their baseline case is that trade policy will keep the core personal consumption expenditures index at about 2.6 percent through the end of the year (It could climb higher if more tariffs are announced).
Powell has been loath to offer any thoughts on how Trump’s agenda will affect inflation or employment, but aggressive trade policies may force the Fed chief to react to an uncomfortable combination of higher price levels and lower growth.
The president on Monday directed a 25 percent tariff on all steel and aluminum imports, an echo of first-term policies that boosted the domestic metals industry but drove up prices for manufacturers. The 10 percent tariffs on Chinese goods that Trump dubbed an “opening salvo” are in effect. New “reciprocal” tariffs – which would raise rates on imported goods to equal foreign levies — are expected later in the week. Given Trump’s campaign pledge to impose tariffs as high as 20 percent on all imports, more could be in the pipeline.
Their ultimate effect on prices will depend on duration and retaliatory actions but, at a certain point, a barrage of policy-related spikes could push consumers past their breaking point. Thomas said the effects could be similar to what occurred in Japan when consumption taxes climbed from 5 percent to 8 percent in 2014; consumer spending sank and growth slowed to a crawl.
Japan’s economic circumstances are radically different from those of the U.S. in 2025. Japanese economic policymakers were struggling to address a long period of deflation, rather than inflation, and the challenges posed by its aging population were much more acute than what the U.S. faces. Still, the consequences of that one-off shock merit consideration as Trump weighs new tariffs.
“We’ve just become so sensitized to inflation because of its role in the campaign — and its salience in our lives — that we stopped analyzing what these sorts of one-time price shocks do to spending,” Thomas said.
It’s TUESDAY — For econ policy thoughts, Wall Street tips, personnel moves or general thoughts, email Sam at ssutton@politico.com.
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Driving the Day
Fed’s Powell testifies at Senate Banking at 10 a.m. … The House Ways and Means Oversight Subcommittee holds a hearing on “IRS Return on Investment and the Need for Modernization” at 10 a.m. … House Agriculture holds a hearing “Examining the Economic Crisis in Farm Country” at 10 a.m. … The House Financial Services Digital Assets, Financial Technology, and Artificial Intelligence Subcommittee holds a hearing on “A Golden Age of Digital Assets: Charting a Path Forward” at 2:30 p.m. … SEC Commissioner Hester Peirce, CFTC Commissioner Summer Mersinger, Sen. Cynthia Lummis, (R-Wyo.) and Rep. Dusty Johnson (R-S.D.) will speak at a Federalist Society event on digital assets at 3 p.m. … Fed Gov. Michelle Bowman speaks at the 2025 Iowa Bankers Association Bank Management and Policy Conference at 3:30 p.m.
The Battle of BFS — The Trump administration is moving to end a court order that barred affiliates of Elon Musk’s Department of Government Efficiency from accessing the department’s sensitive payment system, arguing that U.S. District Judge Paul Engelmayer’s decision on Saturday was a “remarkable intrusion” that was unconstitutional and should be “dissolved immediately,” Kyle Cheney reports.
— Former Treasury Secretaries Robert Rubin, Lawrence Summers, Timothy Geithner,Jack Lew and Janet Yellen penned a NYT op-ed saying the DOGE incursion at their former department “subjects America’s payments system and the highly sensitive data within it to the risk of exposure, potentially to our adversaries.”
Where we’re headed? — Also from Kyle: “A federal judge says the Trump administration has been violating his order to resume funding federal grants that the White House attempted to block with a blanket spending freeze last month.”
The rule of law — The NYT’s Adam Liptak reports that the flurry of executive actions — many of which have already been temporarily blocked by court order — represents a “chaotic flood of activity that collectively amounts to a radically new conception of presidential power. But the volume and speed of those actions may overwhelm and thus thwart sober and measured judicial consideration.”
Foreign Corrupt Practices Act paused — Trump on Monday signed an executive order that paused enforcement of a decades-old law that prohibits U.S. businesses from bribing foreign officials. “It sounds good, but it hurts the country,” Trump said, per CNBC’s Eamon Javers and Dan Mangan. “Many, many deals are unable to be made because nobody wants to do business because they don’t want to feel like every time they pick up the phone, they’re going to jail.”
Save the CAT — The Securities and Exchange Commission on Monday issued an order that exempts financial firms from having to feed detailed investor information into a massive stock-trading surveillance system, Declan Harty reports. SIFMA President and CEO Kenneth Bentsen praised the order as “entirely appropriate and long overdue.”
On The Hill
Beneficial ownership — Jasper Goodman and Katherine Hapgood report that the House overwhelmingly passed legislation Monday that would extend the deadline for millions of small businesses to report their ownership information to Treasury under an anti-money laundering law, one of six bipartisan Financial Services bills that cleared the chamber.
Scott tees up Powell hearing — At today’s hearing, Senate Banking Chair Tim Scott will press Powell “on the need for the Federal Reserve to avoid politics and focus on right-sizing rules and proposals to protect access to capital and financial products for workers and small businesses across the country,” according to a spokesperson for the South Carolina Republican. Expect questions about Basel III, “debanking” and regulatory rightsizing.
A full stable of stablecoin bills — Jasper snagged a copy of ranking House Financial Services Democrat Maxine Waters’ bill to create a regulatory framework for dollar-pegged digital tokens. Sen. Bill Hagerty (R-Tenn.) and House Financial Services Chair French Hill (R-Ark.) released text of their own stablecoin bills last week.
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Jobs report
Republican Jonathan McKernan has stepped down from the Federal Deposit Insurance Corp. board. McKernan, whose term expired last year, posted on X that the arrival of Acting Comptroller Rodney Hood meant that there were more Republicans on the board than permitted by law. “I’ve every confidence that under the new FDIC leadership, the FDIC will succeed in its mission while also reversing the regulatory overreaches of the last few years,”he said.
The Investment Company Institute has promoted Erica Elliott Richardson to chief of staff to the industry group’s President and CEO Eric Pan. Richardson previously worked at the CFTC during the Trump administration and was a senior staffer to Republicans on the Hill.
