Aurelia Butler

Unlock the White House Watch newsletter for freeYour guide to what Trump’s second term means for Washington, business and the worldThe Federal Reserve warned of rising economic risks when it kept interest rates on hold in early May, and minutes from that meeting — due to be published next week — will be poured over by investors for further signs of concern.Chair Jay Powell used his speech in the first week of May to highlight rising “uncertainty” surrounding the trajectory of the world’s biggest economy, with markets having swung sharply on President Donald Trump’s trade tariff announcements.Markets are currently pricing in close to two interest rate cuts by the end of this year. But some strategists think that is overly optimistic, at a time when investors are also betting that inflation one year from now will be roughly 3.4 per cent, according to the one-year US inflation swap. While the minutes may give investors a sense of how the Federal Open Market Committee views the potential economic hit from Trump’s trade war, the president’s policies have changed drastically since the central bank last met. Washington agreed with China to slash tariffs two weeks ago but on Friday warned of plans to slap a 50 per cent tariff on imports from the EU.“The May FOMC minutes should underscore the notion that the Fed is frozen in place until there is greater clarity on policy,” said Bank of America strategists.“Any details on how the Fed would respond to stagflation, if it were to materialise, would be of interest to markets. But we doubt the Fed would want to lose optionality by being explicit on its reaction function at this stage,” BofA added. Inflation data for April, also due next week, will similarly be closely watched. ING strategists expect the core Personal Consumption Expenditures index, the Fed’s preferred inflation gauge, to rise 0.1 per cent month on month. George SteerIs the trade war back on?Tariff concerns seemed to have taken a back seat for financial markets by this week, overtaken by headlines about US government spending and tax policies.Then on Friday, Trump lashed out at the EU, threatening a 50 per cent tariff on the bloc. European and US stocks fell, and safe assets such as gold and sovereign debt rallied.Until then, markets seemed to have dismissed the prospect of a full-blown, economically harmful trade war: Wall Street stocks had rallied to levels well above their levels before Trump’s “liberation day” tariff blitz. Friday’s news could put the prospect back on the table, leaving investors considering the possibility of a major disruption of global trade. “The market forgot about the tariffs too quickly,” said Emmanuel Cau, head of European equities strategy at Barclays. “There was a lot of focus on the deficit, but the broad macro picture is still contingent on this trade war. We are not done with it.” Some analysts rejected the notion that the trade war was back on, suggesting that Trump would capitulate as he did with China. “This looks similar to Trump’s ‘escalate to de-escalate’ strategy for China,” said Jordan Rochester, head of macro strategy for Emea at Mizuho International. “Will it lead to a climbdown in a few weeks time? The China example suggests ‘yes’.”However, Cau pointed out that “this is going to be a very complex negotiation” because of the multi-layered nature of the EU bloc, and warned investors against “being tempted to buy the dip”. Emily HerbertWill bitcoin’s rally continue?Bitcoin’s small but vocal army of bullish supporters have had plenty to cheer in recent weeks. The cryptocurrency hit record levels this week, extending a rally that began days after Trump unveiled his aggressive tariff policy in April. The token’s 43 per cent rise since April 8 has outstripped the 10 per cent gain for gold and 24 per cent rise for the Nasdaq Composite in the same period.Inflows into US exchange traded funds have hit $5.4bn this month, on track for the best month since January, according to data from SoSoValue. It was “a powerful signal of deepening institutional engagement”, said Hina Sattar Joshi, director of digital assets at TP ICAP.Bitcoin enthusiasts say the drivers of the rally remain intact. Executives and traders point to a fresh wave of companies buying bitcoin to hold in their corporate treasuries. They also mention the uncertainty over US tariffs and the country’s ballooning debt reducing the attractiveness of dollar assets such as Treasuries.Prices have also been boosted as politicians in Washington move closer to agreeing the first US rules for stablecoins, a type of digital currency that maintains the same value as the dollar.“Combine all this with bitcoin’s inherent scarcity, and it creates a perfect storm for a comeback,” said Roshan Robert, chief executive of the US arm of OKX, the crypto exchange.Analysts are wondering how much further bitcoin’s rally has to run.Geoff Kendrick of Standard Chartered forecasts the cryptocurrency will rise to $120,000 by the end of June and $200,000 by the end of the year. Philip Stafford 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. The notion that China needs to rebalance its economy towards greater consumer spending is now well established. For over a decade, economists have been warning that there are limits to delivering high, sustained growth from Beijing’s investment- and export-led model.But there is widespread scepticism that the Chinese Communist party can oversee a significant boost to household consumption. So this week, I asked analysts to outline why long-term consumer spending growth in China might surprise on the upside (even if that was not their view). Here’s what they said.First, the downbeat narrative around China’s consumption underplays how large it already is. Consumer spending accounts for around 40 per cent of the country’s economy. Although the global average is about 20 percentage points higher, in absolute terms China’s consumer market is the world’s second largest (behind the US) and has grown at an unrivalled rate.In the two decades prior to the pandemic, Chinese consumer spending grew at a compounded annual growth rate of 9 per cent in real terms, according to BCA Research. Some content could not load. Check your internet connection or browser settings.Its share of global consumption far exceeds its share of global GDP in several aspirational and discretionary spending categories, based on data compiled by the McKinsey Global Institute. “China is the largest market in terms of volume and value for almost any consumer product — ranging from vehicles and smartphones to luxury goods and cinema,” says Rory Green, chief China economist at TS Lombard. For measure, it would not take much for China to replace exports to the US with domestic consumption. Calculations from Capital Economics show that retail sales in the country are 10 times larger than its exports to America. High production has, in part, helped to nurture China’s domestic retail market. Goods and services are relatively cheap. (On a purchasing power parity basis, China has a bigger economy than the US.) This means high-income households can sustain decent living standards using less of their salary.Despite economic pressures, young Chinese consumers are also not retreating from spending. “Gen Z and millennials are still eagerly spending on travel, outdoor experiences and gaming”, said Keyu Jin, a global economist currently affiliated with the Hong Kong University of Science and Technology. “The bulk of consumer credit goes to people under 35. With one click on Alibaba, you can borrow to buy a lipstick.”Simply put, there is an established consumer culture in China that provides a large, solid base on which to grow. By 2030, Boston Consulting Group estimates that the country’s middle- and upper-class population will exceed half a billion people (well above the entire US population). This means even a slight uplift in spending propensities would notably boost total consumption. The nation’s uniquely high levels of investment and savings have detracted from this. Some content could not load. Check your internet connection or browser settings.China’s zero-Covid pandemic approach and its real estate crash have, however, scarred households. Consumer confidence remains significantly below pre-2020 levels, and precautionary savings are elevated.There are nascent signs of a turnaround. “Households have now largely filled the hole in their balance sheets from the decline in property prices with bank deposits,” says Adam Wolfe, emerging markets economist at Absolute Strategy Research. “House prices are stabilising, and demand for safe financial assets should ease.”A first-quarter Deutsche Bank poll found that 52 per cent of Chinese consumers were willing to increase their discretionary expenditures, the highest share in a year.Stimulus initiatives have helped a bit. In September, the People’s Bank of China reduced bank reserve requirements, cut mortgage rates and boosted support for the equity market. In March, the government outlined a “special action plan” which included promises of higher wages and childcare subsidies. A trade-in scheme — which provides financial incentives to exchange old goods for new ones — is also propping up expenditure. But further jolts are needed.Some content could not load. Check your internet connection or browser settings.Still, a sustained, long-term increase to consumer spending would require a permanent boost to household confidence and a significant reduction in savings.Beijing’s long struggle to raise consumption and its focus on production have however caused analysts to doubt that households can play a significantly stronger role in its economy. There are three upside structural risks to that view: reforms, urbanisation and demographics. The importance of raising consumption has gained political traction. It also dovetails with President Xi Jinping’s philosophies of “dual circulation” (strengthening domestic and international demand) and “common prosperity” (reducing inequality). US President Donald Trump’s global tariff agenda adds a further nudge to Chinese policymakers. Disruptions to external demand raises the salience of its internal market. Trade partners are also on alert for US-bound exports from China being diverted elsewhere. Beijing will be wary about burning bridges, and may be more conscious about exporting its high production abroad.Some content could not load. Check your internet connection or browser settings.“After years of trade-related tensions with the European Union, Australia and other major players, Beijing may see an opportunity to bolster its global standing by playing nice on trade while Washington continues to play hardball”, says Morning Consult’s head of political intelligence, Jason McMann. Urbanisation is another potential upside. Two-thirds of China’s population live in cities. In OECD nations, the average is above 80 per cent. Continued and faster migration to urban areas would boost income and spending on services.China’s Hukou household registration system does however limit rural migrants’ access to social services and benefits in urban areas. Rhodium Group reckons granting full access to basic urban services would significantly boost consumption. A 2025 study found migrants’ per capita consumption increased by 30 per cent when they move to a city, with an additional 30 per cent rise when they are fully integrated into urban life.More broadly, even the capitalist-in-chief US spends more on social transfers than communist China. Beijing also only raises around 1 per cent of its GDP from income tax, well below advanced economies. China’s weak welfare system incentivises higher precautionary savings (and a reliance on debt in poorer, rural areas). Xi has spoken against “welfarism”. But what China has now is some way off a system that “encourages laziness”.Some content could not load. Check your internet connection or browser settings.Further, long-term uplift could come from its ageing population. As a higher proportion of Chinese retire, the ratio of savers to consumers will decline.“In east Asia the pattern of high working-age saving is particularly strong”, notes Green. Indeed, South Korea and Japan also both experienced peak savings rates when the working-age share of their populations topped out. Green reckons China’s choppier population pyramid could result in a faster drop in its savings rate, relative to other Asian nations. “Even if policy reforms are ineffective, China is going to save less”, he said in a recent note.Some content could not load. Check your internet connection or browser settings.President Xi remains focused on “new quality productive forces”. This could indeed support jobs and income. But Michael Pettis, senior associate at the Carnegie Endowment for International Peace, says that it would be unrealistic to rely on this strategy alone to boost consumption. Generating the required productivity gains, and ensuring they mostly accrue to workers, will be an uphill task. Indeed, the efficiency of China’s capital spending has been on a downtrend, according to BCA Research. “It has led to excess capacity, deflation and scores of lossmaking enterprises”.Other options to sustainably boost household incomes would necessitate significant policy reform (which Beijing so far has been hesitating over), says Pettis. “Beijing could transfer income from local governments, particularly to poorer, more indebted households. Or it could strengthen the social safety network.” Some content could not load. Check your internet connection or browser settings.Continuing the shift into higher-value added production could support growth. It will require more targeted investment. But if Beijing is serious about turning China into a “medium-developed country” by 2035, it needs to unleash the potential of its large consumer base.Short-term stimulus packages help. But they do little to raise long-term household confidence. Welfare (and tax) reforms would recycle high savings into spending in the real economy, generate higher growth from urbanisation and, in turn, help build China’s mature and innovative retail ecosystem.Policymakers are taking consumption more seriously. Gradual, albeit small-scale reforms have been taking place within the hukou, pensions and benefits systems. As the economic and geopolitical limits of the country’s existing growth strategy becomes clearer, Beijing could leverage its centralised policy apparatus to turbocharge consumer spending.“Beijing has time and again demonstrated the ability to do the unexpected, to reach its longer-term goals,” says David Goodman, director of the China Studies Centre at the University of Sydney, who has been studying the nation for more than 50 years. China’s consumers have struggled in recent years. But there is enormous spending power yet to be unlocked, and Beijing holds the key.Send your rebuttals and thoughts to [email protected] or on X @tejparikh90.Food for thoughtEconomists are always looking for ways to enhance their forecasting capabilities. This IMF paper introduces a “nowcasting” model that leverages satellite-based data of global maritime movements.Recommended 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 White House Watch newsletter for freeYour guide to what Trump’s second term means for Washington, business and the worldSoftBank founder Masayoshi Son has floated the idea of creating a joint US-Japan sovereign wealth fund to make large-scale investments in tech and infrastructure across the US.The idea has been raised at very high political levels in Washington and Tokyo, according to three people close to the situation, and has been proposed by Masayoshi Son’s team as a template for other governments to forge closer investment ties with the US.The plan, which has been discussed directly between Son and US Treasury Secretary Scott Bessent and outlined to other top government figures in both countries, has not yet crystallised into a formal proposal, according to three people close to the situation. The joint fund idea has been raised several times in recent weeks, however, as Japanese negotiators and the Trump administration edge towards a trade deal. Japan has dug into a position where it will push for zero tariffs, while the US side has made it clear that it will go no lower than its “baseline” tariff of 10 per cent.But following a call between Donald Trump and Japanese Prime Minister Shigeru Ishiba on Friday, the latter told domestic media he now expected that a planned meeting between the two on the sidelines of the G7 meeting in Canada in mid-June would be a “milestone” in negotiations.Under the suggested wealth fund structure, the US Treasury and the Japanese ministry of finance would be joint owners and operators of the fund, each with a significant stake. They would then open the vehicle to other limited partner investors, and could potentially offer ordinary Americans and Japanese the chance to own a slice.Japanese Prime Minister Shigeru Ishiba, left, with US President Donald Trump at the White House in Washington in February More

Unlock the White House Watch newsletter for freeYour guide to what Trump’s second term means for Washington, business and the worldA multibillion-dollar push by US President Donald Trump to tax money sent from the US abroad is likely to hurt poor Central American families the hardest while driving migrants to use informal, underground routes to send cash back home.The “big, beautiful” tax bill passed by the US House of Representatives on Thursday included a 3.5 per cent tax on remittance transfers made by anyone who is not a US citizen or national.The levy comes as part of a broader plan to try to halt illegal migration and deport more of the roughly 11 million undocumented migrants already in the country.The US is the largest origin country for remittances in the world, with more than $656bn sent overseas in 2023, according to the World Bank.Experts said there were several ways the tax could be circumvented. Migrants could ask a US citizen friend or family member to send the money, use cryptocurrencies or even drive the black market of informal cash services — like “mules” who move money physically. The tax would add to the costs of remittances, though, reversing years of effort by policymakers to make formal channels for sending money more competitive. “It is essentially a tax on the very poor,” said Andrew Selee, president of the Washington-based Migration Policy Institute. The measure could also be an irritant for US citizens who send money abroad, he added — since they would now be required to affirm their nationality in order to claim a tax refund under the rules.Mexico’s president Claudia Sheinbaum has pushed back multiple times against the US tax. More

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Donald Trump loves to make deals. And he may be calculating that his sudden escalation of tariffs on the EU will squeeze Brussels into making big concessions as he opens a new front in his global trade war. But it is a risky bet. Although trade talks between the US and the EU had been moving slowly, Trump’s threat to put 50 per cent tariffs on all imports from the bloc from June 1 has raised the economic and diplomatic stakes dramatically.The move threatens to jeopardise a recent recovery in global equity prices triggered by Trump’s tilt towards dealmaking and de-escalation with other trading partners, including the UK and China. It could also further damage strained transatlantic relations.The gamble reflects the frustration of the president and his top officials with what they view as the EU’s obstruction in the negotiations — and a belief that Brussels will concede first or suffer more than the US if there is no deal.“It’s a classic Trump bullying tactic, it’s what he does. If he doesn’t get what he wants, he pushes back and makes more threats, and then he waits to see what happens,” said Bill Reinsch, a trade policy expert at the Center for Strategic and International Studies in Washington. “It’s intended to get the Europeans to back down — my reading of them is that they won’t,” he added. In the Oval Office on Friday afternoon, Trump insisted he wasn’t looking for a quick agreement with Brussels, and vowed that the 50 per cent tariffs would take effect on June 1 as planned. “That’s the way it is,” he said. US Treasury secretary Scott Bessent told Fox News that the purpose of the planned tariffs was to “light a fire under the EU” — suggesting that there was some leeway for negotiations before or after the June 1 deadline. But the brinkmanship creates uncertainty, warn economists. “The proposed tariffs on the EU highlight a key forecast risk, whereby tariffs remain an ongoing tool to be wielded by the Trump administration whenever negotiations hit a snag. Repeated tariff threats and rollbacks will keep policy uncertainty elevated,” consultancy Oxford Economics wrote in a note on Friday.Washington’s precise demands on Brussels are unclear. In his social media post on Friday, Trump rattled off his dissatisfaction with many aspects of EU tax, regulatory and trade policy that would be hard to address quickly. Trade experts in Washington say the administration is frustrated that the EU’s offers are no different from those it has made to the US in the past. “Normal methods of diplomacy and traditional approaches to trade negotiations have not resulted in a US-EU trade agreement by any administration. So I’m not surprised to see the president take a very different tack with the EU,” said Kelly Ann Shaw, a former White House official during Trump’s first term, and a partner in international trade policy at law firm Akin Gump. “These threats of much higher tariffs do create an action forcing event, where the two sides are either going to come to an agreement or they aren’t,” she added. “The American point of view is that the Europeans don’t understand that this time is different, and it’s not a conventional negotiation,” said Reinsch at CSIS. On Friday, EU trade commissioner Maroš Šefčovič spoke with US commerce secretary Howard Lutnick and trade representative Jamieson Greer, but there did not appear to be a breakthrough. “EU-US trade is unmatched & must be guided by mutual respect, not threats. We stand ready to defend our interests,” Šefčovič wrote on X after the discussions.EU officials chafe at Trump’s demands, questioning why the world’s biggest trading bloc should offer unilateral concessions.They argue that there is only about a 1 percentage point difference between EU and US tariffs and say that value added tax is roughly equivalent to US sales tax.Brussels is also reluctant to give the US market access denied to other countries, which would breach World Trade Organization rules.Officials also point out that while trade policy is handled by the European Commission, many of the barriers the US has issues with are national. “EU negotiators should hold their nerve. It certainly signals Washington’s edginess and impatience to get a deal,” said Georg Riekeles, associate director at the European Policy Centre in Brussels. Riekeles urged the EU to copy Canada and China by retaliating strongly. “If the EU is ready to fight back, US bullying and escalation is ultimately so self-harming that you can enter deal territory.”However, countries such as Ireland and Italy, which rely on US exports, have lobbied hard against strong countermeasures — and Trump will be counting on schisms within the bloc to force the EU’s hands.But Michael Smart, a former Democratic congressional trade counsel at Rock Creek Global Advisors, a consulting group in Washington, warned that “if Trump’s plan is to divide the bloc, it likely will have the opposite effect”. Most member states have so far backed the commission’s approach of engaging but eating up time, believing that eventually Trump will back down because of the damage his tariffs will inflict on the US economy. They have indicated that Brussels is minded to stand firm.“One of the reasons markets have calmed down is that they have already factored in more concessions from Trump,” said one EU diplomat.“We don’t make policy decisions on the basis of tweets, at least not on this side of the Atlantic,” said another.  More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is an FT contributing editorThis month the Federal Reserve decided it would cut its own workforce by a tenth over the next several years. The move has been reported as a way to find savings at the Fed before the so-called Department of Government Efficiency knocks on the door. That may be right, but the Fed has another problem it doesn’t like to talk about: it’s operating at a loss. On purpose.When a commercial bank lends you money, it’s adding both an asset and a liability to its own balance sheet. The asset is the loan itself, which you will repay over time. The liability is brand-new deposits, which it marks up from scratch in your account. Those deposits are brand-new money.The Federal Reserve is a special bank, but it’s still a bank. When it adds assets to its own balance sheet like treasuries or mortgage-backed securities, it matches those with liabilities — either brand-new physical dollar notes or brand-new deposits. We call deposits at the Fed reserves, but they’re just deposits. There is no magic to this, no special money creation. It’s just banking.The point of a commercial bank is to operate at a profit, keeping returns on assets higher than the costs of liabilities. But macroeconomists have come to believe that this just isn’t true of the Fed. It issues dollars and can always issue more, therefore losses don’t matter. But this is an assumption, not a law of physics. What it misses is the political importance of seigniorage — the profit to the sovereign nation’s coffers for manufacturing money.Until 2023, the Fed consistently made a profit. The returns on its assets were higher than the costs of its liabilities. It returned some of this profit to the government, demonstrating its strength both as a bank and as political institution. It is easier to remain independent of the White House when you’re the one paying for the privilege.The Fed’s liabilities used to cost it nothing. First, even though physical dollar notes are a liability for the Fed, they don’t pay interest. Second, commercial banks have always had to hold some of their assets as deposits at the Fed — reserves. The Fed didn’t pay interest on these either, until a 2006 law, implemented during the beginning of the Global Financial Crisis in 2008. Traditionally, bankers have felt about holding reserves the way children feel about taking a bath. They’re against it, but that’s not really the point, because it’s not their decision. Reserves aren’t supposed to be profitable — they’re supposed to be safe. Once the Fed started paying interest on reserves, however, this necessity didn’t seem that painful. Banks got used to holding a safe asset with a small but guaranteed return. They started holding way more reserves than they needed to.Now the Fed is stuck in an operating system it calls the ample-reserves regime, one where bankers love bath time. Under this regime, the Fed carries out interest-rate policy by moving the interest it pays on reserves up and down. It decides, essentially, how much to lose on its liabilities. This isn’t quantitative easing in an emergency, it’s just normal operations. In 2023, the Fed reported a loss of $114bn; in 2024, $78bn.This is a departure without a discussion. The reason we assume the Fed cannot possibly fail is that Congress will always protect its central bank with the promise of new capital in an emergency. Now, in perfectly normal years, the Fed can incur losses when it raises its rates.The Fed books these losses as what it calls deferred assets, a note of how much profit it will have to earn back before it can start paying its contribution to the Department of the Treasury again. This is a privilege unique to the Fed, a tacit understanding that there will be lean and fat years, which will balance each other out as rates fall again in the future.The profit the Fed makes on issuing dollar cash may be going away as well. Cash continues to decline as a share of total payments. The White House and Republicans in Congress have made clear that the Fed is not to replace dollar cash on its own balance sheet with any other kind of liability, such as a digital currency.At the same time, a bill in the Senate would instead bring stablecoins providers into a regulatory regime where they have to hold assets against every coin in either Treasuries, reserves at the Fed, insured bank deposits, or treasury repurchase agreements. This means over the long term, the Fed’s profits on cash are moving to the private sector.None of this mattered in normal times, when the Fed was supported by a consensus with Congress and the White House on the norms of monetary policy. But these are not normal times. The Federal Reserve is a bank. And we should be clear about exactly whose bank it is, whether Congress and the White House expect a profit, and what they plan to do about a loss. More