Aurelia Butler

This article is an on-site version of our FirstFT newsletter. Subscribers can sign up to our Asia, Europe/Africa or Americas edition to get the newsletter delivered every weekday morning. Explore all of our newsletters hereGood morning and welcome back. We’ll update you on developments in the Middle East, and here’s what else we’re covering: Tesla launches its first robotaxi service Vanguard’s fixed income push into EuropeThe ‘Kirklandisation’ of legal servicesDonald Trump has raised the prospect of “regime change” in Iran after US military aircraft joined Israel’s campaign and bombed nuclear facilities in the country, drawing America into another Middle East war. Here’s what we know. Donald Trump’s Truth Social posts: In a burst of social media posts overnight, the US president hailed the return of B-2 bombers to Missouri after they struck three nuclear sites in Iran. He said the damage to the sites in Fordow, Natanz and Isfahan was “monumental” and floated a scenario where the government in Tehran might collapse. “It’s not politically correct to use the term, ‘Regime Change,’ but if the current Iranian Regime is unable to MAKE IRAN GREAT AGAIN, why wouldn’t there be a Regime change???,” Trump wrote. “MIGA!,” he added.Trump’s comments directly contradicted those of his vice-president JD Vance, who told NBC yesterday: “Our view has been very clear that we don’t want a regime change. We do not want to protract this or build this out any more than it’s already been built out.” He added: “We want to end their nuclear programme, and then we want to talk to the Iranians about a long-term settlement.”How has Iran reacted? Iran’s top military commander said his forces were entitled to retaliate against US interests after Washington struck the Islamic republic. Major General Abdolrahim Mousavi said the US strikes meant his forces “are fully authorised to take any action against the US military and its interests, and we will never retreat from these steps”. Iran’s Supreme Leader Ayatollah Ali Khamenei faces the most consequential decision of his almost 40 years in power. Does he look for a diplomatic compromise with Trump, seek to escalate or try to keep the conflict contained to Israel?What’s been the reaction elsewhere: Brent crude, the international oil benchmark, rose as much as 5.7 per cent to $81.40, a five-month high, before paring gains to trade up 0.8 per cent at $77.63 in London this morning. British Airways and Singapore Airlines cancelled flights to Dubai after the US strikes on Iran. More than 150 carriers, including Air France-KLM, American Airlines and Japan Airlines, have now suspended flights in the region after airspace over Israel, Iraq and Jordan was closed because of the war between Israel and Iran. Capitals across the Gulf, meanwhile, have been shaken by Trump’s decision to launch military action after rolling out the red carpet for the US president just a few weeks ago. What’s next? US officials said there were no plans for further attacks unless Iran hit back. Trump will chair a national security meeting later today after the biggest gamble of his combined four and a half years in office. Iran’s foreign minister Abbas Araghchi travels to Moscow today where he will meet Russian President Vladimir Putin, one of Tehran’s closest allies. Iran’s exiled crown prince, Reza Pahlavi, holds a press conference in Paris. Israel has signalled it will press on with its bombing raids against Iran. Follow our live blog for the latest updates, and we have more analysis on the conflict:Inside Operation Midnight Hammer: How the US used stealth and decoys to launch a surprise attack on Iran.Where is Iran’s uranium? US and Israeli attacks hit key nuclear sites but questions remain over Iran’s stash of enriched material.In maps: Iran’s three nuclear sites targeted by US bombers.Gideon Rachman: Tehran’s grand strategy has failed, but that is no guarantee Israel and the US can succeed, writes our chief foreign affairs commentator.Join our subscriber-only webinar on Wednesday with FT journalists and guests and put your questions about the conflict to our panel. Register here. And here’s what else we’re keeping tabs on today:Federal Reserve: Michelle Bowman, vice-chair for supervision at the US central bank, speaks about monetary policy and banking at the 2025 International Journal of Central Banking annual conference, in Prague. Austan Goolsbee, president of the Chicago Fed, participates in a moderated question-and-answer session at the Milwaukee Business Journal Mid-Year Outlook 2025.The FT will hold a special online webinar today on the Trump administration’s efforts to reindustrialise the US and its focus on reshoring as the country’s industrial strategy enters a new phase. Register for free.Five more top stories1. Tesla’s robotaxi service launched yesterday in the company’s home city of Austin, Texas, involving about 10 vehicles, each with a human safety driver on board, amid regulatory scrutiny of the company’s self-driving technology. Chief executive Elon Musk has touted the self-driving taxis as the future of his flagging electric-car maker.2. Vanguard, the world’s second-largest asset manager, is cutting fees on almost half of its bond exchange traded funds in Europe as part of a push into the fixed income market and as competition among the biggest fund providers heats up. Vanguard estimates the total savings for investors will amount to about $3.5mn annually. Read more about the changes.3. Twenty-two people were killed and 63 injured when a suicide bomber blew himself up inside a packed church in Damascus, marking the first major security incident in the Syrian capital since the regime of Bashar al-Assad was toppled last December. The Syrian government said jihadi group Isis was responsible for the attack.4. Japan’s ruling party has suffered its worst result in local assembly elections in Tokyo, as residents of the capital used the vote to protest against soaring food prices and low wage growth. The results of Sunday’s poll underscored the challenge Prime Minister Shigeru Ishiba could face next month in elections for the upper house of Japan’s national parliament.5. Revolut’s chief executive is in line for a multibillion-dollar windfall if he more than triples the company’s current valuation to about $150bn. People familiar with the matter say Nik Storonsky, who founded the fintech in 2015, would see his stake increase significantly under a long-standing Elon Musk-style pay deal. News in-depthKirkland & Ellis overturned a long-standing norm in the legal industry More

This article is an on-site version of Free Lunch newsletter. Premium subscribers can sign up here to get the newsletter delivered every Thursday and Sunday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersWelcome back. Businesses and investors are sensitive to developments in Donald Trump’s tariff agenda. After all, as import duties directly affect profit margins and supply chains, their economic impact feels tangible and imminent.But there is another component of the US president’s policy plans that could be just as significant — if not more so — for the world’s largest economy: his immigration crackdown. A notable fall in foreign workers in America “represents a far more sustained negative supply shock for the economy than tariffs”, says George Saravelos, head of FX research at Deutsche Bank. “But immigration garners less market attention, as the pass-through to economic activity takes longer and is harder to monitor.”So this week, I outline why Trump’s immigration policy could indeed end up scarring the US economy more than his tariffs.Right now, there are three strands to the president’s immigration agenda. “The first is shutting down illegal and legal crossings along the US-Mexico border,” says Alex Nowrasteh, vice-president at the Cato Institute. “The second is increasing deportations from the interior by empowering Immigration and Customs Enforcement. And finally, reducing legal immigration by ending refugee programmes, reducing student visas, instituting country bans and raising the barriers to acquiring visas.”All three pillars are now taking effect. Migrant encounters at the south-west land border have fallen to lows not seen since the 1960s. According to ICE, there were an average of 2,000 arrests per day in the first week of June, compared with just over 300 per day in the 2024 fiscal year under the Biden administration.Alongside last month’s disruption to student visa interviews, universities and research bodies have been threatened with funding cuts from the White House. Indeed, in March, three-quarters of postgraduate researchers and PhD students who answered a poll for Nature magazine said they were considering leaving the US. A recent decline in tourist arrivals is also indicative of the general caution over travelling stateside.Some content could not load. Check your internet connection or browser settings.Trump’s plans have led economists to lower their projections for US immigration. A forthcoming study by the Brookings Institution and American Enterprise Institute is expected to project net negative immigration to the country this year. That hasn’t happened in at least half a century of data. This will be driven by fewer arrivals, alongside deportations and voluntary exits, say the researchers.Evercore ISI expects net immigration to stay negative beyond this year, too. While there is notable uncertainty around its assumptions, the investment banking firm reckons America’s foreign-born population could drop by around 500,000 per year over the next three years. That’s before factoring in Trump’s policies regarding universities and student visas. “The increased risk of seeing applications denied or visas revoked may dissuade students from choosing the US,” says Marco Casiraghi, a director at the company. “As will less funding for research.”Some content could not load. Check your internet connection or browser settings.This is a significant problem for the US economy, because its recent growth has depended on foreign-born labour. The US labour market has been “supply constrained” since the Covid-19 pandemic, partly as a result of “excess retirements”, explains Dhaval Joshi, a chief strategist at BCA Research. “Strong growth in labour supply — driven by immigration — in a supply-constrained economy explains why US GDP has grown faster than most expected over the past few years,” he says.Indeed, the impressive growth in US jobs following the pandemic has been driven by foreign workers.Some content could not load. Check your internet connection or browser settings.Without immigration, America’s population would be shrinking. “America is an ageing, sub-replacement-fertility society today, and its native-born working-age population is no longer growing,” says Nicholas Eberstadt, a political economist at the AEI. The participation rate among the US-born labour force has been stagnant in recent years and remains below pre-pandemic levels. This means lower immigration will drag the country’s annual potential growth rate notably below its recent 2 per cent level. For measure, Morgan Stanley expects it to drop towards 1.5 per cent in 2026, as Trump’s policies reduce total hours worked.Simply put, the loss of foreign workers is akin to removing an economic input. (In contrast, by raising the cost of production, tariffs mostly impact how inputs are utilised.)It would leave the US extra reliant on generating significant productivity gains, for instance from artificial intelligence, to prop up its growth.Some content could not load. Check your internet connection or browser settings.Some content could not load. Check your internet connection or browser settings.Foreign workers have an added impact on America’s economic growth potential, beyond their direct supply of labour.There were an estimated 8.3 million unauthorised workers in the US in 2022, accounting for around 5 per cent of the US workforce, according to the Pew Research Center.These workers tend to prop up core industries where there are existing shortages, including construction, agriculture and manufacturing. In some hands-on occupations, such as brick masonry and roofing, which employ a high proportion of undocumented labourers, labour-saving technologies are still limited. After taxes, this group also has over $250bn in annual spending power, according to the American Immigration Council.For these reasons, “deporting workers . . . reduces jobs for other US workers”, notes the Peterson Institute for International Economics in a recent study. Even in the think-tank’s “low” scenario, involving the deportation of 1.3 million unauthorised workers, it finds US GDP to be 1.2 per cent below baseline in 2028. The loss of labour supply also pushes up inflation.Higher-skilled foreign workers have a more significant economic role in boosting US productivity via innovation and enterprise.Despite accounting for around 5 per cent of the US workforce, high-skilled immigrants comprise a larger share of the labour pool in industries that require advanced education and specialised experience, says Goldman Sachs in a recent research note. These include information services, semiconductor design, scientific research and pharmaceuticals.NBER research estimates that US immigrants founded a fifth of venture capital-backed start-ups between 1990 and 2019. One-quarter of the aggregate economic value created by patents in companies between 1990 and 2016 came from foreign-born workers too.Some content could not load. Check your internet connection or browser settings.There is, of course, plenty of uncertainty about how Trump’s immigration policy will play out. Analysts expect the administration to fall short on its promises of “mass deportation” — which could mean targeting 1mn deportations per year — given the logistical challenges involved. Highly skilled workers and students may also be unable to find suitable opportunities abroad in the short term.Still, baseline projections from Evercore ISI, Brookings and AEI for net immigration to turn negative, at least in the near term, will generate worse outcomes for the US economy in the long run than tariffs.For measure, assuming Trump’s immigration agenda only amounted to the PIIE’s low-end deportation scenario, real GDP would still fall further from baseline when compared to his various tariff plans.This result may feel counterintuitive. That is partly because markets and businesses are so focused on the immediacy and bottom-line consequences of tariffs. But tariff and immigration shocks propagate through the economy via different channels. Tariffs are a tax on importers. In the near term, they push up prices and weaken demand by raising uncertainty. Over time they sap supply by coddling, and shifting resources to, less efficient companies. But reducing foreign workers is more akin to directly removing resources, as well as a source of demand and innovation, from the economy. It just takes slightly longer to filter through. Some content could not load. Check your internet connection or browser settings.Tariffs — and their effects — are also likely to be less permanent than a hit to labour supply. Future administrations can lower, or remove, any import duties. They can also reduce immigration barriers (although politically that may be harder). But generally trade flows and supply chains are more responsive to changes in policy, costs and economic conditions than migratory flows, at least in the short run. This means once a chunk of the labour force has been reduced, it won’t be easy to scale it back up quickly. Skilled workers, students and unauthorised immigrants could remain risk averse to committing to life in the US for some time after Trump’s second term. In the long run, it is the loss of people from abroad — and not the cost of goods from outside — that will prove far more damaging to America’s prosperity. Send your rebuttals and thoughts to [email protected] or on X @tejparikh90.Food for thoughtWhy do people follow rules even when they are given incentives not to do so? A new study finds conformism to be a significant factor.Free Lunch on Sunday is edited by Harvey NriapiaRecommended newsletters for youTrade Secrets — A must-read on the changing face of international trade and globalisation. Sign up hereUnhedged — Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The Federal Reserve’s favoured inflation metric is expected to show a slight tick uptick in price pressures in May, with an acceleration in both core and headline measures, as the effects of Donald Trump’s tariffs begin to appear in US prices. On Friday, the Bureau of Economic Analysis will release the personal consumption expenditures index data for May, which economists surveyed by Bloomberg forecast will show a headline figure of 2.3 per cent year over year, up from 2.1 per cent the month prior. The core measure, which strips out the volatile food and energy sectors and is most closely watched by the Fed, is expected to be 2.6 per cent, a step up from the 2.5 per cent rate in April.The PCE data will follow a modest jump in consumer price pressures recorded earlier this month, which showed CPI at 2.4 per cent in May, below economists’ expectations of 2.5 per cent, but above the rate of 2.3 per cent recorded in April. An bigger acceleration in price pressures could deter the Federal Reserve from cutting interest rates any time soon. Traders in the futures market currently expect the Fed to lower borrowing costs twice this year, beginning in October.Even a muted inflation number is unlikely to signal to the central bank that the coast is clear for rate cuts, according to analysts at ING. “This is very much the calm before the storm, with tariff-induced price hikes expected to become visible from July,” they said. Kate DuguidHow is the Eurozone economy handling trade uncertainty? Investors will be looking at business data next week for clues about the health of the Eurozone economy as trade uncertainty rumbles on for the bloc. The HCOB Eurozone purchasing managers’ index, a monthly poll of supply chain managers, is expected to show a higher reading for both services and manufacturing in June, as the immediate uncertainty following Trump’s April tariff announcement has waned. However, the improvement is not expected to be sufficient to return either sector to growth. “The direction of travel is definitely up,” said Tomasz Wieladek, chief European economist at T Rowe Price. “There’s been a break in bad trade news, so people are expecting things to get a bit better.” A poll of economists by Reuters suggests that the manufacturing reading is likely to rise from 49.4 in May to 49.7, while the services figure is expected to rise from 49.7 to reach 50. A reading above 50 indicates expansion. Wieladek said he would be watching the services number particularly closely, partly because “manufacturing [data] is polluted by frontloading dynamics” as businesses make pre-emptive purchases before US tariffs come into effect. The European Central Bank cut interest rates to 2 per cent earlier this month, but took a more hawkish tone than expected about future rate cuts. Weaker than expected PMI data would bolster the case for faster rate reductions.Wieladek added that economic sentiment could deteriorate later in the year. “Trade is still a big uncertainty,” he said. “We just don’t know how this is going to end.” Emily HerbertIs activity still growing in the UK?UK PMIs are also on investors’ agenda, with surveys for June on Monday offering an indication of how the economy is holding up after a strong start to the year.Policymakers have turned to surveys such as the PMIs to estimate the pace of “underlying” growth, arguing that headline figures can be distorted by one-off effects. In the first quarter, GDP rose 0.7 per cent, driven in part by temporary factors such as stockpiling ahead of US tariff changes. Underlying growth, the Bank of England said, was closer to zero — and it is expected to remain subdued in the second quarter.Economists polled by Bloomberg expect the flash composite PMI, which tracks activity in the manufacturing and services sectors, to edge up to 50.5 in June from 50.3 in May. A reading above 50 signals expansion.Receding fears over US tariffs probably buoyed confidence in June, as they did in May. But renewed instability in the Middle East is adding fresh concerns for businesses, particularly over supply chain disruptions, rising oil prices and their knock-on effects on consumer demand and operating costs.Manufacturing is expected to stay in contraction, dragged down by trade uncertainty and continued job losses. This is likely to partially offset modest growth in services. The survey will also offer an update on inflationary pressures, with firms facing higher wage and national insurance costs since April — and revealing how far these are being passed on to consumers. Valentina Romei More

Unlock the White House Watch newsletter for freeYour guide to what Trump’s second term means for Washington, business and the worldThe writer is a former prime minister of Italy, president of the Jacques Delors Institute and a dean at IE UniversityDonald Trump’s actions in his second term make clear that we are dealing with a long-term strategic vision that aims to reshape America’s global role, weaken multilateralism and increase pressure on allies, especially Europe. The US president is pursuing an agenda that forces the EU to face an urgent reality: it must strengthen its autonomy and capacity to act. Paradoxically, Trump’s challenge offers an unprecedented opportunity for Europe to do just that. It could be the catalyst that drives deeper integration and a stronger, more decisive EU. This EU must begin by fully leveraging its two most powerful assets: the single market and the euro. The single market has given Europe economic weight and resilience, but it remains incomplete. In a world of continental powers and economic blocs, no single EU member state can act alone. To navigate today’s geopolitical storm, we must scale up and build a truly European market, starting with finance, energy, innovation and, yes, defence. Without scale in these domains, Europe risks becoming an economic colony. This is not a theoretical danger: Europe increasingly depends on foreign platforms for digital infrastructure, on non-European investors to finance its industrial base and on external powers for energy and military protection. The risks here are political as well as economic: this dependency constrains our ability to act in our own interest, leaving us vulnerable to decisions made elsewhere. The immediate priority is to unlock the full potential of the single market, starting with completing integration in financial markets. Europe is a capital-rich continent that, paradoxically, underinvests in itself. Each year, billions of euros in household savings flow out of the EU, and much of that capital lies idle in low-yielding deposit accounts. These resources must be mobilised in pursuit of our own strategic goals. A single European capital market would channel European savings towards European businesses, enhancing innovation, the green and digital transitions and industrial competitiveness. Achieving this goal requires, alongside national efforts, a coherent European strategy focused on concrete policies: the creation of attractive and secure pan-European savings products; consolidation of trading and post-trading infrastructures; centralisation of supervisory powers for cross-border activities; alignment of insolvency, tax and company laws, as well as the establishment of what European Commission president Ursula von der Leyen has called a “28th regime”, a single regulatory framework across the EU; globally competitive asset managers; and a stronger ecosystem for scale-ups. In short, the proposed savings and investments union — which was a central pillar of my report Much More Than a Market — offers a comprehensive policy framework to deepen EU capital markets. To implement it, we should introduce the binding deadlines that worked for the creation of the euro, for example by fixing July 1 2027 as the starting date.We must also do more to realise the full potential of the euro. Nearly 20 per cent of global reserves are held in euros, but the lack of a genuine European safe asset and fragmented financial markets limit its role. As Christine Lagarde, president of the European Central Bank, has repeatedly stressed, strengthening the euro is key to Europe’s resilience. In a world in which economic power is increasingly weaponised through sanctions, trade restrictions and financial coercion, this is no longer just an economic issue — it is a question of sovereignty. Amid growing uncertainty over the role of the dollar as the world’s reserve currency and global appetite for US Treasuries, Europe has a historic opportunity. Expanding the international role of the euro would enable the EU to reduce financing costs for both governments and businesses and to attract more investment. Recent initiatives such as NextGenerationEU, the Safe instrument for defence and the digital euro project have helped lay the groundwork for the emergence of a true European safe asset. Still, we must go further. One more far-reaching idea is scaling up the market for supranational EU bonds significantly, not necessarily through new debt, but by gradually replacing part of national debt with common bonds. Global investors are actively seeking alternatives to the US Treasury market. A large, deep and liquid Eurobond market would meet this demand and provide the foundation for a truly autonomous European financial system. The global order is being reshaped before our eyes. If Europe wants to remain a global actor, it must act now, together. Economic and financial integration is not an end in itself — it is the foundation of strategic autonomy.As Jacques Delors once warned, Europe faces a choice: renewal or decline. Without bold action, current economic and demographic trends will push Europe towards marginalisation and irrelevance on the global stage. But this is not an inevitability. Political will and strategic vision can still make the difference. By building on our unique assets — our market and currency, our history and values — we can equip the EU with the tools it needs not just to resist decline, but to shape its own future with confidence and purpose. More

Chinese manufacturers are racing to find buyers at home and abroad as trade tensions with the US threaten their single largest export market.Chinese trade data released since US President Donald Trump announced high tariffs in April shows increased exports to alternative markets partially offsetting a plunge in US-bound shipments.The value of exports to Europe in May climbed 12 per cent from a year earlier, with shipments to Germany up 22 per cent. Exports to south-east Asian countries rose 15 per cent.Analysts said China’s manufacturers would be able to make up in other markets at least some of the sales lost because of US tariffs, helping to ensure exports remain a pillar of a national economy still struggling with a property sector downturn and weak consumer confidence.“Consumption is weak and there’s less driving the economy on that front,” said Leah Fahy, China economist at Capital Economics. “China’s still going to have to export all this stuff, so it’s going to have to go to other countries and they’re going to face a surge in Chinese imports.”Some content could not load. Check your internet connection or browser settings.Manufacturers’ efforts are on display in Zhejiang, China’s second-biggest exporting province, where many factory owners are urgently shifting focus towards trading partners that look more stable than the US, or to the large but fiercely contested domestic market.“We want to find new customers in markets like Europe,” said Xia Shukun, a manager at Shaoxing Sulong Outdoor Technology, which until now has only exported to Asia and the US.Xia said a Norwegian buyer had recently toured their factory, where the screech of blades slicing metal for camp stoves reverberates across three floors, raising hopes the company might win its first customer in Europe. “We’re very eager — we can make anything,” Xia said.With average US tariff rates on Chinese goods still above 50 per cent, and the possibility Trump will reimpose sky-high rates that would make most trade unviable, factory owners and managers up and down the Zhejiang coast said they were looking for new markets.Chen Zebin, whose family runs nail lamp manufacturer Shaoxing Shangyu Lihua Electronic Technology, said the proportion of its output going to the US had fallen to about 30 per cent this year from 60 per cent in 2024, prompting it to shift to more domestic sales, where margins are thinner. A production line at Shaoxing Shangyu Lihua Electronic Technology More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Donald Trump’s tariffs have opened a schism at the Federal Reserve as top policymakers spar over whether to cut interest rates as soon as this summer or hold them steady for the remainder of 2025.Christopher Waller, a Fed governor seen as a candidate to replace Jay Powell as its next chair, on Friday called for a rate cut as soon as next month and played down the risks that US president’s levies would push up inflation. “We’ve been on pause for six months thinking that there was going to be a big tariff shock to inflation. We haven’t seen it,” Waller, who became a Fed governor in 2020 after Trump nominated him to the post during his first term, said in a CNBC interview. “We should be basing policy . . . on the data.”Waller’s comments came just two days after the Fed kept rates on hold for its fourth meeting in a row in a unanimous decision, following 1 percentage point of reductions in 2024. Trump has sharply criticised the Fed for not slashing rates, with the president on Friday evening calling for cuts of up to 3.5 percentage points and deriding Powell as a “dumb guy and obvious Trump Hater”. “I don’t know why the Board doesn’t override this Total and Complete Moron,” the US president posted on Truth Social. “Maybe, just maybe, I have to change my mind about firing him? But regardless, his Term ends shortly!” The president mused earlier in the week about whether he should “appoint myself” to the world’s most influential central bank. A set of projections released on Wednesday showed a widening divide among the central bank’s top policymakers on whether or not they would be able to cut rates multiple times this year — or not at all.Powell, whose term as Fed chair ends in May 2026, acknowledged on Wednesday that there was a “pretty healthy diversity of views on the committee”, but noted that there was “strong support” for the decision to keep interest rates on hold for now. The Fed chair also expected that differences among committee members would “diminish” once more data on the economy came in over the coming months. “With uncertainty as elevated as it is, no one holds these rate paths with a lot of conviction,” he said. There were still 10 members expecting two or more quarter-point cuts this year, according to Wednesday’s economic projections. But seven now forecast no rate cuts and two are expecting one cut.“One notable thing is the number of Fed officials who think there should be no cuts has grown. There is clearly a difference in opinion among the committee,” said Rick Rieder, BlackRock’s chief investment officer for global fixed income, who oversees about $2.4tn in assets. The debate at the Fed centres on whether to keep borrowing costs higher because of expectations that Trump’s tariffs will raise prices, or cut rates to offset any softening of economic growth. Rates at 4.25-4.5 per cent are considered to be above the so-called neutral level, which neither accelerates nor slows the economy.The Fed’s projections this week showed that policymakers overall expect a significant slowdown in growth this year and an increase in inflation. But price increases from tariffs so far have remained muted, with the May reading for consumer price index inflation last week coming in softer than expected, with prices rising 2.4 per cent from the previous year. Mary Daly, president of the Federal Reserve Bank of San Francisco, said on CNBC on Friday that she had become less concerned about the impact of tariffs on inflation. She added that while she didn’t envision a cut in July, there would be a greater possibility in the autumn.“I don’t think the concerns [on inflation] are as large as they were when the tariffs were first announced,” Daly said. “But we cannot wait so long that we forget that the fundamentals of the economy are moving in the direction where an interest rate adjustment might be necessary.”While some officials think the US jobs market remains solid, others believe the labour market is weakening in some sectors.Powell on Wednesday warned that the central bank’s “obligation is to keep longer-term inflation expectations well anchored”. Inflation remains above the Fed’s target of 2 per cent.“For the time being, we are well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance,” he said.Futures markets signal that investors expect two quarter-point cuts this year, beginning in October, according to Bloomberg data. “I think Waller was reflecting honestly on how the Fed is a lot closer to cutting than they’re letting on, they just need some sort of a more definitive confirmation from the economy that they need to move,” said Steven Blitz, chief US economist at TS Lombard. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Observers might be forgiven for thinking that financial markets don’t care much about geopolitical shocks. The world’s largest economy is threatening to put itself behind a tariff wall. War rages on in Europe. And since June 13 a fresh Middle East conflict has broken out. Yet, the S&P 500 remains near record highs. It has been resilient this week even as the US considered joining Israel’s war on Iran. Brent crude prices are up, but only to a tame $77 per barrel. Have investors lost touch with reality? A look at historical market reactions to global events suggests not.Using data going back to the second world war, Deutsche Bank finds that, on average, the S&P 500 tends to fall by around 6 per cent in the three weeks following a geopolitical shock, only to recover fully three weeks later. In other words, if history is any guide, there is still time for the market reaction to the Israel-Iran conflict to evolve.Each shock also manifests itself in different ways. Adolf Hitler’s annexation of Czechoslovakia in 1939 triggered a 20 per cent crash in the main US equity index. That took over a month to bottom out. The 9/11 attacks sparked a sell-off of over 10 per cent in just six days that recovered in three weeks. The 1973 oil embargo by Arab countries following the Yom Kippur war sparked an inflation crisis from which developed markets took years to recover. Europe’s high dependence on Russian gas meant its industries were hampered by high costs for a long period after Vladimir Putin invaded Ukraine in February 2022. Germany’s Dax index continued trending downwards until October that year.What can we learn from these events? The market reaction typically comes in two parts. First, the shock buffets investor confidence, stoking a flight to safety. Second, depending on the event’s economic significance and persistence, it eventually seeps into earnings, investment plans, prices and jobs, which then leads traders to price in a changed economic outlook.Right now, confronted by both the tariff and Middle East shocks, investors are trying to ascertain their effects on the real economy. The sharp initial sell-off triggered by Donald Trump’s “liberation day” duties was only staved off by a 90-day pause in its enforcement. That deadline is up on July 8, with little clarity over what happens next.As for the Israel-Iran war, the more restrained immediate reaction, at least relative to historical energy shocks, makes sense. Oil is less significant in powering the global economy than it was in the 1970s. Supply is also less concentrated. Iran’s oil exports account for less than 2 per cent of global demand, and in 2020, the US became an annual net exporter of total petroleum for the first time since at least 1949.This has focused investors’ minds on what matters most for the global economy from the crisis. The greatest risk is an escalation, potentially with the US entering the conflict, that leads to the closure of the Strait of Hormuz, through which a fifth of the world’s daily oil consumption flows. If that were to happen, analysts reckon oil could push above $120 a barrel. A temporary price shock could then turn into more sustained inflation, with knock-on implications for central banks.This leaves traders carefully watching developments on both tariffs and the Middle East war, recalibrating probabilities for worst-case scenarios in real time. Only when uncertainty clears up can investors properly reassess their forecasts for economic fundamentals, which underpin asset valuations. For now, however, July 9 remains a big unknown. And, though President Trump appeared on Thursday to be allowing time for negotiation with Iran, as he warned earlier, “nobody knows what I’m going to do”. Despite recent appearances, geopolitics does matter for markets — as soon as it affects the real economy. Today may prove to be the relative calm before the storm. More

Unlock the White House Watch newsletter for freeYour guide to what Trump’s second term means for Washington, business and the worldThe US Federal Reserve should begin cutting interest rates as soon as next month, a top official has said, underscoring the deepening schism at the central bank on whether to reduce borrowing costs this year. Fed governor Christopher Waller, a top contender to succeed chair Jay Powell, said that economic data supported lowering rates in the near-term despite the threat of higher inflation from President Donald Trump’s tariffs. “I think we’re in that position and that we could do this as early as July,” Waller, who joined the Fed’s policy-setting panel in 2020 after being nominated by Trump during his first term, told CNBC on Friday. “You’d want to start slow and bring them down just to make sure that there’s no big surprises. But start the process. That’s the key thing.”Fed policymakers are divided on whether to lower rates at all this year amid fears that tariff turbulence could cause a fresh surge in inflation while also cooling economic growth.The Federal Open Market Committee this week opted to hold rates steady in a range of 4.25-4.5 per cent for the fourth consecutive meeting, even as Trump piles pressure on Powell, whose term as Fed chair expires in May 2026, to slash them. Ten members of the committee forecast two or more quarter-point cuts by the end of the year, while seven forecast none. Two expect just one cut. Powell said on Wednesday “We are well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance” and warned “our job is to make sure that a one-time increase in inflation doesn’t turn into an inflation problem.”But Waller said that any serious tariff price impact had yet to materialise and would be a once-off effect when it did. “We’ve been on pause for six months thinking that there was going to be a big tariff shock to inflation. We haven’t seen it,” he said. “We should be basing policy . . . on the data.”“I don’t think we need to wait much longer, because even if the tariffs come in later, the impacts are still the same, it should be a one-off level effect and not cause persistent inflation.”Trump lashed out at Powell following this week’s FOMC decision and said rates should be 2.5 percentage points lower in order to reduce the cost of interest payments on US government debt. “‘Too Late’ Jerome Powell is costing our Country Hundreds of Billions of Dollars. He is truly one of the dumbest, and most destructive, people in Government, and the Fed Board is complicit,” the president wrote on his Truth Social platform on Thursday. Asked about the president’s comments, Waller insisted that for the Fed, it “not our job” to address the cost of financing government debt. “Our mandate from Congress tells us to worry about unemployment and price stability, and that’s what we’re doing. It does not tell us to provide cheap financing to the US government,” he said. “That is really the job of Congress and the Treasury to make sure you have a fiscal situation that is sustainable that will bring the deficits down and that will put downward pressure on interest rates all by itself.” More