Aurelia Butler

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Unlock the White House Watch newsletter for freeYour guide to what Trump’s second term means for Washington, business and the worldA senior Federal Reserve official has put the chances that Donald Trump’s trade war leads to a sustained burst of inflation at “50-50”, as he warned US rate-setters would face uncertainty “right through the summer”. St Louis Fed president Alberto Musalem told the Financial Times that while Trump’s levies could boost inflation for “a quarter or two”, there was “an equally likely scenario where the impact of tariffs on prices could last longer”. The Trump administration has already brought US tariffs on the country’s trading partners to the highest level in almost 90 years, threatening to fuel higher inflation and slow economic growth. The competing forces have prompted policymakers to adopt a wait-and-see approach after cutting interest rates by 1 percentage point during the second half of last year. Bond markets have also been rattled in recent weeks by Trump’s “big, beautiful” budget bill, which Congress’s fiscal watchdog estimates will add $2.4tn to the public debt over the next decade. The bill passed the House last month but is still being debated in the Senate. Musalem, who holds a vote on the Federal Open Market Committee this year, said officials could benefit from a favourable scenario where uncertainty over trade and fiscal policy “goes away in July”. He said that such a scenario would potentially put the Fed back on track to cut rates.However, Musalem also raised the prospect of another scenario “where inflation begins to rise materially and we will not know whether that is a temporary, one-off increase in the price level or whether it has more persistence”.Musalem added that “right now, it’s probably a 50-50 assessment” that either situation would emerge. Economists say the Fed’s reluctance to cut is in large part due to the expectation that tariffs will raise US prices in the coming months and push headline PCE inflation from 2.1 per cent to levels well in excess of rate-setters’ goal of 2 per cent. Recent surveys show consumers and businesses expect higher inflation in the coming months and years as tariffs take effect. Those expectations have raised concerns among Fed officials that people could lose faith in the central bank’s ability to keep inflation low. The Fed’s deliberations come at a politically fraught moment for the central bank. Trump has repeatedly attacked chair Jay Powell for not cutting rates, and on Friday called for a “full point” reduction in borrowing costs. Political interference could make it more difficult for the central bank to lower interest rates. Musalem said independence was important as it allowed for “more anchored inflation expectations”. Fed officials — including Musalem — see keeping inflation expectations in check, or “anchored”, as a vital precondition for cutting rates. “If market-implied and/or survey measures of medium- to long-term inflation expectations begin to rise, at that point it becomes very important to prioritise price stability,” the St Louis Fed president said.Musalem’s remarks, made on Friday, come ahead of the blackout period for the Fed’s mid-June policy vote, where officials will almost certainly keep interest rates on hold. The FOMC will also publish a fresh round of quarterly economic projections. Musalem said he did not “expect to change my numbers very much relative to the March round”, despite the more precarious economic environment following Trump’s so-called liberation day tariff announcement in early April. “I think we still have some uncertainty. Through the summer, we need to understand what the trade negotiations may be, what legal challenges there may be, or how that resolves in terms of the tariffs. I’m also focusing on fiscal policy and what the shape of that is going to be along with immigration policy and regulatory policy.” He said the market reaction to “liberation day” “certainly caught my attention”. Musalem, who spent decades working in finance before joining the Fed, said: “There are days when markets send you a very clear message and that was one of those days.” Investors responded to Trump’s policies by selling US equities and the dollar, as well as 10-year Treasury bonds. The unusual correlation signalled concerns among investors of the US’s long-held haven status. Conversations with asset managers suggested that they were looking to gradually rebalance their portfolios even as markets had stabilised in recent weeks, Musalem said. “The situation had been one of overweight US assets and underweight assets in other countries,” the St Louis Fed president said. “And asset managers are indicating that may change going forward.” More

Unlock the White House Watch newsletter for freeYour guide to what Trump’s second term means for Washington, business and the worldDonald Trump has intensified his attacks on Jay Powell, calling on the US Federal Reserve chair to slash interest rates by a “full point” after official figures pointed to a weakening labour market. The US economy added 139,000 jobs in May, compared with a downwardly revised 147,000 posts added in April, according to data released by the Bureau of Labor Statistics on Friday. The BLS also revised down the March figures, bringing the average jobs gains for the year until May to 124,000, compared with 168,000 in 2024. “‘Too Late’ at the Fed is a disaster!” Trump wrote on his Truth Social platform following the release, using a nickname he has given to the Fed chair. “Despite him, our Country is doing great. Go for a full point, Rocket Fuel!”“He is costing our Country a fortune,” Trump added, referring to borrowing costs on US debt. Asked by reporters later who he expected to be the next Fed chair, Trump replied: “It’s coming out very soon.”He had a “pretty good idea” who that person would be, he added, without elaborating.Congress’s fiscal watchdog warned this week that the president’s landmark “big, beautiful bill” would add $2.4tn to the US debt by 2034. The Congressional Budget Office report came when many senior executives on Wall Street were already warning that such high debt levels could hit the bond market, sending yields rising. Trump’s fresh attacks on Powell come after the European Central Bank on Thursday cut rates by a further quarter point. The ECB has halved borrowing costs over the past year. The Fed has paused a rate-cutting cycle that began in 2024 as policymakers weigh the effects of Trump’s tariffs, which many economists expect to increase inflation while cooling growth. Trump and Powell met last week, with the US president telling the Fed chief he was making a “mistake” by not cutting rates.Powell has held firm in the face of Trump’s pressure, however, telling the president that its policy decisions would “depend entirely on incoming economic information”.Friday’s data from the BLS beat market expectations, coming in ahead of the 126,000 predicted by economists polled by Bloomberg. The unemployment rate held steady at 4.2 per cent. Despite the better than anticipated May figure — which Trump hailed as “GREAT JOB NUMBERS” — economists said that the revisions to prior data suggested the market was weakening. “The headline beat isn’t nearly as impressive as it appears at first glance,” said Thomas Simons at US investment bank Jefferies, noting the revisions. “Job growth has clearly shifted into a lower trajectory.”Marc Giannoni, chief US economist at Barclays, added: “We expect more slowing over the course of the year.” The OECD warned this week that the global economy was heading into its weakest period of growth since the Covid-19 pandemic as Trump’s trade war weighs on the world’s top economies.Some content could not load. Check your internet connection or browser settings.Average hourly earnings rose by 0.4 per cent to $36.24, the BLS said, bringing to 3.9 per cent the increase over the past year. Treasury yields rose after the data was released as traders marginally scaled back expectations for interest rate cuts this year. Futures markets are now pricing in a small chance that the Fed could cut rates one more time this year, although two reductions remains their central expectation.“For the Fed this means they are on hold for a while,” said Giannoni. “The latest employment report does not give them any reason to be alarmed.”The S&P 500 rose 1.1 per cent in afternoon trading in New York. Friday’s jobs numbers were dragged down by a continued slide in the number of government jobs amid a cost-cutting effort by the so-called Department of Government Efficiency, led until last week by Elon Musk.Musk and Trump’s relationship erupted into acrimony this week after the billionaire tech executive left his role and blasted the president’s signature tax bill as “a disgusting abomination” that would swell US debt. But Doge’s efficiency drive has already led to the loss of 59,000 federal government workers since January, according to the BLS. That has been offset slightly by a rise in hiring in the leisure and hospitality sectors. More

Unlock the White House Watch newsletter for freeYour guide to what Trump’s second term means for Washington, business and the worldDonald Trump said a new high-level round of trade talks between the US and China would take place on Monday in London, as Washington and Beijing move quickly to try to stabilise their fraught economic relations.The US president announced details of the negotiations a day after a phone call with Chinese President Xi Jinping during which the two leaders agreed to try to ease the trade war that has been shaking financial markets.Treasury secretary Scott Bessent, commerce Howard Lutnick and US trade representative Jamieson Greer will be meeting in London on June 9 with “Representatives of China, with reference to the Trade Deal”, Trump announced in a Truth Social post on Friday. “The meeting should go very well. Thank you for your attention to this matter!”The Chinese embassy in Washington did not immediately respond to a request for comment on the planned talks in London.The planned meeting in London next week comes little more than two months after Trump’s “liberation day” tariffs unleashed a tit-for-tat escalation in levies between the world’s largest economies that soared as high as 145 per cent. Last month in Geneva, Bessent sealed a deal on behalf of Trump to mutually reduce the tariffs in the face of a market backlash and concerns of severe damage to global supply chains.But even after the truce in Switzerland, tensions between the US and China have remained high. Some of the most notable sticking points, such as rare earth exports and trade in advanced technologies, including semiconductors, will be high on the agenda in the London negotiations.The launch of the new round of talks in the UK capital will be reassuring to investors, pointing to a desire in Washington and Beijing not to completely rupture the economic relationship.During the Biden administration, as well as during the first Trump administration, periods of economic friction between the US and China were often followed by periods of détente and dealmaking through similar ministerial-level talks.During their call, Trump and Xi also agreed to mutual visits of each other’s countries but have not settled on any dates.Wall Street took news of the talks in its stride on Friday. The S&P 500 held on to most of its gains from earlier in the session and closed 1 per cent higher. More

The writer is professor of economics at Harvard University and author of ‘Our Dollar, Your Problem’US fiscal policy is running off the rails, and there seems to be little political will in either party to fix it until a major crisis occurs. The 2024 budget deficit was a mind-blowing 6.4 per cent of GDP; credible forecasts suggest that the deficit will exceed 7 per cent of GDP for the rest of President Donald Trump’s term. And that is assuming there is no black swan event that once again causes growth to crater and debt to balloon. With US debt already exceeding 120 per cent of GDP, it seems a budget crisis of some sort is more likely than not over the next five years.True, if markets trusted US politicians to prioritise fully repaying bond holders — domestic and foreign — above all else, and not to engage in partial default through inflation, there would be nothing to worry about. Unfortunately, if one looks at the long history of debt and inflation crises, the overwhelming majority occur in situations where the government could pay if it felt like it. Typically, a crisis is catalysed by a major shock that catches policymakers on their back foot, when debt is already very high, and fiscal policy inflexible.Certainly the One Big Beautiful Bill Act preserves the tax cuts from Trump’s first term, which in all likelihood helped spur growth. However, the evidence from several rounds of tax cuts going back to Ronald Reagan in the 1980s suggests that they do not nearly pay for themselves. Indeed they have been the major contributor to the steady run-up in debt during the 21st century. And Trump’s new tax bill contains a raft of highly distortionary add-ons — no tax on tips, overtime or social security — that are not helpful. Not surprisingly, the Congressional Budget Office concluded that the bill would add $2.4tn to debt over the next decade.The real problem for politicians is that American voters have become conditioned to never having to deal with sacrifice. And why should they?  Since Bill Clinton last balanced the budget at the end of the 1990s, both Republican and Democratic leaders have tripped over themselves to run ever larger deficits, seemingly without consequence. And if there is a recession, financial crisis or pandemic, voters count on getting the best recovery that money can buy. Who cares about another 20 to 30 per cent of GDP in debt?What has changed, unfortunately, is that long-term real interest rates today are far higher than they were in the 2010s. Between 2012 and 2021, the inflation-indexed 10-year US Treasury bond yield averaged around zero. Today, it is over 2 per cent and, going forward, interest payments are likely to be an ever-larger force pushing up the US debt-to-GDP ratio. Real interest rises are far more painful today than they were two decades ago, when US debt to GDP was half what it is now.Why are real rates rising? One reason, of course, is record global debt levels, both public and private. This is only part of the story, however, and not necessarily the most important part.  Other factors — including geopolitical tensions, the fracturing of global trade, rising military expenditures, the prospective power needs of AI and populism — are all important. Yes, inequality and demographics arguably push the other way, which is why a number of prominent scholars still believe a sustained return to ultra-low real interest rates will ultimately save the day. But should the US, which aims to be global hegemon for another century or more, be betting the farm on this? Indeed, although long-term interest rates may fall, it is equally possible they may rise with the US 10-year rate, now around 4.5 per cent, eventually reaching 6 per cent or more. The rise will be exacerbated if Trump succeeds in achieving his dream of a lower US current account deficit, the flip side being less foreign money coming into the US.It will also be exacerbated if, as I argue in my latest book, US dollar dominance is now fraying at the edges as China continues decoupling from the dollar, Europe remilitarises and cryptocurrencies take market share in the massive global underground economy. Trump’s tariff wars, threats to tax foreign investment and efforts to undermine the rule of law will only accelerate the process. Indeed, if he succeeds in achieving his dream of closing up the US current account deficit, the reduced inflow of foreign capital will push US interest rates up further, and growth will also suffer.Just because the US debt trajectory is unsustainable does not mean it needs to end dramatically. After all, instead of allowing interest rates to continue drifting up, the government can invoke growth-stifling Japanese-style financial repression, keeping interest rates artificially low and thereby converting any crisis into a slow-motion crash.  But slow growth is hardly a desirable outcome, either. Inflation is the more likely scenario given the centrality of finance to US growth, with the government (whether Trump or a successor) finding a way to undermine the independence of the Federal Reserve. The US’s high debt and inflexible political equilibrium will be a major amplifier of the next crisis and, in most scenarios, the American economy and the dollar’s global status will be the losers. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.US import costs of steel and aluminium, used in everything from baseball bats to cars and aircraft parts, are expected to rise by more than $100bn after Donald Trump raised tariffs on the metals to 50 per cent this week.The higher levies that took effect on Wednesday will result in additional costs of $52.6bn a year on steel and aluminium products, according to estimates by Boston Consulting Group. The new rate takes the total expected costs on imports to $104bn, roughly double the $51.4bn impact forecast by the consultancy before Trump originally introduced a 25 per cent levy in March.Analysts said the complex web of tariffs imposed by the US and Trump’s frequent changes to his tariff regime have made it difficult to predict how the global trade of the metals would be affected and how much prices of the products would increase in the US.“We have not really seen changes in trade flows with a 25 per cent price hike so far,” said BCG’s managing director Nicole Voigt. “The question is, will we see it with a 50 per cent price hike and this depends on how the price movement [of the metals] will go.”During a UBS conference earlier this week, Ford’s chief financial officer Sherry House said half of the $2.5bn in gross tariff impact it forecast for 2025 came from parts that included steel and aluminium. The numbers could fluctuate due to the tariff negotiations between the US and China, House said, adding: “The China tariffs brings the parts piece down and the aluminium and steel brings the parts piece up. So the good news is they’re offsetting.”Canada and the European Union were the biggest exporters to the US of steel and aluminium products last year, while China was the largest for steel derivatives and Mexico for aluminium derivatives, according to the Congressional Research Service.The new US tariffs could result in export losses of up to $2bn for the metals sector in Canada for the rest of this year, $1bn for Mexico and $600mn for South Korea, Allianz Research estimated. European steel producers have warned that the 50 per cent tariff meant that most of the 3.8mn tonnes of EU exports to the US were now under a “de facto import ban”. They are worried that much of the steel from other countries that had been destined for the US market will now be deflected towards Europe instead, similar to what happened in 2018 when the first US tariffs were introduced. The European Commission this week reported large increases in import volumes and steep price drops for a series of steel products, including guitars to industrial robots, since the start of the year.Tariffs imposed during the first Trump administration reduced imports of steel and aluminium products by an estimated 24 per cent and 31 per cent on average, the US International Trade Commission found in 2023. While this raised average US prices of steel and aluminium by 2.4 per cent and 1.6 per cent respectively, American production of the metals only increased by a small amount. US steel producers have stepped up plans to expand production to boost capacity and help to fill some of the gaps that will be left by a drop in imports, but industry experts said it would take time before the new mills were operational. Philip Bell, president of US trade group the Steel Manufacturers Association, stressed that there had been “over $20bn of investment in new steel facilities” since tariffs were first announced in 2018.S&P Global Ratings estimates that the higher costs from steel and aluminium alone could hit earnings of industrial goods manufacturers by “5-10 per cent without price increases in 2025”. Don Marleau, sector lead for metals, capital goods and packaging at S&P Global Ratings, said while this meant that companies would need to raise prices by 2 per cent to hold profits steady, manufacturers were expected to share some of the rising cost burden to support sales. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Tata Steel has warned that it could be excluded from tariff-free access to the US under the UK’s trade agreement with Washington, putting more than £150mn worth of annual exports at risk. Britain’s largest steel producer, which owns the vast Port Talbot site in south Wales, fears that under the agreement announced between the UK and the US last month it will no longer be able to export to America because of the origin of some of its products. After closing its two blast furnaces at Port Talbot last year Tata has been importing steel from its sister plants in India and the Netherlands for processing in the UK to then ship to customers. However, this could breach US import rules that require all steel to be “melted and poured” in the country from which it is imported.Earlier this week US President Donald Trump exempted British steelmakers from a doubling of US steel and aluminium tariffs from 25 per cent to 50 per cent. Last month’s US-UK trade pact promised to lower these tariffs to zero, but it has not yet been agreed when this will take effect, leaving the industry in limbo. Exact details of the deal are also not yet finalised. Rajesh Nair, chief executive of Tata Steel UK, said in a statement on Friday that his company was urging the government to “secure a deal as soon as possible”.He said Tata would need to keep importing steel until its new electric arc furnace is operational from late 2027. It is therefore “critical for our business that melted and poured in the UK is not a requirement to access the steel quotas in any future trade deal”. “Even though we are not currently melting steel in the UK, we remain the largest steel producer in the country and our mills continue to transform imported steel coil and slab into high-value, specialist products which are not available from US producers and are therefore essential to our US customers,” he said. Tata has been warning ministers about the risks to its business for several weeks, according to people familiar with the situation. The company exports more than £150mn worth of steel to the US every year, including for packaging products. UK negotiators have been trying to secure a carve-out for Tata. One government official said the US talks were ongoing, adding that the UK was confident that all British steel producers — including Tata — would “feel the benefit of the deal.”The US is the UK’s second-most important export market for steel after the EU, worth about £400mn a year. British officials are also under pressure from Washington to ensure no Chinese steel enters the US via the UK, given the Chinese ownership of British Steel. The UK government seized control of Britain’s second-biggest steel producer in April. The government has defended its trade agreement with Trump. The UK, said a government spokesperson, was the “first — and currently the only — country to secure a trade deal with the US last month and we remain committed to protecting British business and jobs across key sectors, including steel, as part of our plan for change”. The government would “continue to work with the US to implement our agreement, which will see the 25 per cent US tariffs on steel removed”. More

Stanley Fischer was the Renaissance man of contemporary macroeconomists. He was among the most influential theorists of his generation. He taught many of the leading economic policymakers of the era, including the former chair of the Federal Reserve, Ben Bernanke, and ex-president of the European Central Bank, Mario Draghi. With his friend and colleague, the late Rudi Dornbusch, he co-authored a path-breaking textbook on macroeconomics. Above all, perhaps, while at the IMF he managed the financial crises of the 1990s and early 2000s.After obtaining his PhD at MIT in 1969, Fischer taught at the University of Chicago before returning to MIT as a professor. He was, therefore, ideally equipped to reconcile the free-market traditions of the former with the Keynesian ones of the latter. The result was his seminal article “Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule”, published in 1977. Fischer, who has died aged 81, was born into a Jewish family in Northern Rhodesia (now Zambia). His parents moved to Southern Rhodesia (now Zimbabwe) when he was 13 years old. In 1960, he visited Israel as part of a winter programme for youth leaders, where he studied Hebrew. Subsequently, he studied economics at the London School of Economics between 1962 and 1966 before going to MIT. He was a dual national of the US and Israel.In the words of Olivier Blanchard, his friend and colleague at MIT, “Stan saw early on that the right model of fluctuations combined a central role for expectations, together with important distortions, an essential one being nominal rigidities.” This rescued the arguments in favour of interventionist macroeconomic policy and was, therefore, the foundation stone for the “New Keynesian” macroeconomics that now guides central banks around the world. A complementary area, on which his work was just as “foundational” — according to his former pupil Maurice Obstfeld of the University of California, Berkeley — was “policy credibility”. This, too, has become a guiding principle of modern policymakers. In this vein, Mervyn King, former governor of the Bank of England, notes that, “he was instrumental in helping to promote the cause of Bank independence when he delivered the key paper at the Tercentenary conference of the Bank of England in 1994.”While at MIT, he co-authored another seminal paper, also published in 1977, on “Comparative Advantage, Trade, and Payments” with Dornbusch and the Nobel laureate Paul Samuelson. According to Kenneth Rogoff of Harvard — also a pupil of Fischer’s — this “provided the basis for the modern empirical work on gravity and trade, which has come to dominate international trade research”.Rogoff adds that Fischer’s textbook with Dornbusch (now, updated by Dick Startz of University of California Santa Barbara, in its 13th edition) was “the first to show how to think about the supply shocks that ravaged the global economy in the 1970s”. Also highly influential was Lectures on Macroeconomics, a graduate macroeconomics text, co-authored with Blanchard. His most important of many policymaking roles was as first deputy managing director of the IMF from 1994 to 2001. This turned out to be a period of devastating financial crises, including the Tequila shock which began with the decline of the Mexican peso in 1994. Even more important was the Asian financial crisis, which began in 1997 and was followed by a Russian default in 1998 and Brazilian and Argentine currency crises thereafter.Lawrence Summers, who was at the US Treasury at this time and became Treasury secretary, argues that Fischer “was to international financial crises what [Walter] Bagehot was to banking crises”. He was, he declares, a major architect of the strategy of large-scale, heavily conditional lending as the key tool of crisis response. Moreover, he adds, “no developed-country financial official before or since has been as widely trusted and respected by emerging market policymakers” as he was. This was due to his intellect, but also to his character — integrity, candour and deep respect for the victims of financial crises. His experience and abilities made his candidacy for the position of managing director of the IMF, to replace the disgraced Dominique Strauss-Kahn in 2011, credible. On the merits, he was the best candidate. But nothing could break the cartel between the US and Europe, which guaranteed the choice to the latter.Inevitably, the fund’s actions during his time were criticised. An emergency lender is bound to make what hindsight judges to be mistakes. Fischer thought the IMF had to give policymakers the benefit of the doubt. In some cases, notably Argentina in the late-1990s, I thought this was a mistake. But one had to respect the blend of intellectual rigour with commitment that characterised his approach.After leaving the IMF, the job that meant most to him was that of governor of the Bank of Israel, a position he held from 2005 to 2013. He had to navigate the turbulence of Israeli politics and the global financial crisis, and did so with great success. According to Jacob Frenkel, a distinguished predecessor in this role, the Bank of Israel, “did not ‘fall behind the curve’” in deciding when to loosen and when to tighten policy. Fischer held other important positions. He was chief economist of the World Bank, before going to the IMF, vice-chair of Citigroup and vice-chair of the Fed, under Janet Yellen. What made Fischer exceptional was his combination of abilities. He was a first-class theorist, rigorous analyst, superb manager, loyal friend, supportive boss and a decent human being. Not least, says King, he “always wanted to be where the action was and where he could help people make better policy decisions. It is rare to find someone with that commitment, and even rarer when it is combined with outstanding accomplishments as an economist”. More