This, now, it should be clear to president Trump: he can have a high tariff. Or it can have low interest rates. But it cannot be both.
The problem is that Trump wants both, and it seems that he believes that he can outperform the markets or overcome them in providing benign working conditions while enhancing everything with definitions that raise costs and prices. At this stage, Trump tried the maximum tariff, and the markets have responded with the utmost consequences. The question that has not been answered now is whether Trump will accept the consequences, which, from paradoxes, undermine the other main parts of his agenda.
If Trump is not, investors will enjoy a sweet place in the market and the economy now. Data that gives reading about the pre-fire economy reveals that inflation-the pest of the past three years-has been due to semi-normal levels while growth and unemployment. This was the “soft landing” that is out of reach in which inflation came down without stagnation.
Read more: Latest news and updates on Trump’s tariff
Inflation decreased in March from 2.8 % to 2.4 %, near the Federal Reserve of 2 %. “Before the seizure of the tariff tariffs, the inflation trends of consumers and producers, were not accelerating,” said economist David Rosenberg of Rosenberg Research on April 11.
Low inflation, or contraction, usually reduce interest rates for several reasons. It gives the Federal Reserve more space to reduce its short -term prices without worrying about high prices. It behaves below the bond holders in the long term inflation tending to demand. It can also indicate a decrease in the economy in which demand, low lending, and money price – interest rates – can also decrease.
But prices have been rising since Trump went to the utmost tariff on April 2, the day when he announced tax increases from two number on imports from dozens of commercial partners. Trump contacted them again on April 9, while at the same time the tariffs on most Chinese imports pushed to 145 % destroyed. Interest rates continued to rise, with the standard cabinet jumped from 3.9 % on April 4 to 4.5 % after only one week.
This is a big leap in a short period of time, indicating that there is something annoying. Economically, the markets decide that the Trump tariff will push inflation to the highest than it was, which slows down the American economy, reducing the return on American assets, and making other types of investments more attractive in comparison. Prices should be higher to restore investors to US securities or any other assets linked to the American economy.
Trump, of course, wants the lowest possible interest rates, as he did as a real estate developer depends greatly on credit. The Federal Reserve has called for reducing prices as a way to compensate for the damage caused by definitions. In February, Trump’s Treasury Secretary, Scott Pesin, said, “The president wants lower prices” and was especially focused on the treasury for 10 years, which determines rates on real estate loans and most other consumer and commercial loans.
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If Trump has never launched his trade war, he will have fewer rates – and everyone who borrows will benefit from them. “The problem is that Trump’s introductory disorders are expected to be inflationary,” said economist Ed Yardeni Research in his analysis on April 14. “This means that high inflation is likely to delay any dilution nutrition to avoid recession.”
The markets have now shown that high definitions and low rates are mutually exclusive – as long as the economy grows and consumer spending proves. Therefore, Trump has three options: adhere to identification definitions and accept higher rates, cancel at least some tariffs to reduce prices, or try to impose prices while maintaining tariffs in place.
The markets will chant if Trump changes his opinion on the definitions, but it seems that there is a little chance to happen. Trump can accept higher rates and other negative consequences, and he may eventually have. However, what is related to investors now is that Trump will first try to impose prices through some unconventional experience that can explode worse than Trump’s protective agenda.
One way to rotate with prices is that the Treasury exports less than long -term bonds, such as Treasury bonds for 10 and 30 years, while selling more short -term bills. Janet Yellen did this as the Treasury Secretary in Biden starting in 2023, prompting part of the cabinet debts issued in short -term tools after the recommended range from 20 % to about 22 %. Bessent criticized this step after that, but continued politics as Minister of Treasury. Lifting the part of short -term bills means fewer bonds that enter the market. If the demand for bonds remains stable, then the decrease in the supply means that the prices of bonds will rise and the price of interest rates, in return, will decrease.
A more worrying scenario is for Trump to launch the Federal Reserve Speaker Jerome Powell and try to install a new chair that will be more willing to reduce prices, even if inflation is inflation. Some of Trump’s critics believe that he is preparing to do so exactly, using the Powell scale for high rates and stabilizing a person more likely to take tags from Trump.
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Powell can be fired with counter -results because the markets depend on a central bank that is seen as non -political, even if it makes mistakes. Trump is likely to increase more passionate to reduce short -term rates of inflation because it may indicate that the Federal Reserve has not been particularly concerned with higher enlargement. Short and long -term rates usually move in the same direction, but they do not have to do so, and long -term rates can rise if the short -term federal backup rates threaten high inflation.
The third way in which Trump can decrease long -term prices by causing stagnation, which may happen whether or not Trump intends to do so. Goldman Sachs, for example, raised its possibilities to 65 % when Trump announced his definition on April 2, then decreased to 45 % after many of them delayed on April 9. However, Goldman Sachs, like many other predictors, believes that economic growth in the United States will remain slow towards scratch by the end of 2025, and left only a few predictors if there is another unexpected shock.
In stagnation, high unemployment and lost wages usually reduce spending and depressed demand. This, in turn, usually leads to low prices and reduces inflation concerns. When it is combined with short-term cuts by the Federal Reserve, this is more than sufficient to achieve long-term rates in an area that is likely to make Trump happy-for example, the treasury rate of 10 years of 2 % or less, which may correspond to the mortgage rates about 4 %.
However, Trump is trying to get there, he takes a circular route with low rates, given that he is likely to have if he does not launch his commercial war. It is unlikely a fun journey.
Rick Newman is a big column writer Yahoo financing. Follow it Blouse and x: @Rickjnewman.
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