Having tailwinds for the first three months of 2025 (including strong March job growth), Republicans met headwinds last week: narrowing margins in special elections, an election loss in Wisconsin and economic fears growing darker as a consequence of President Donald Trump’s larger than expected global tariff war.
Like Democrats since last November’s election, most congressional Republicans are at a loss about how to answer the challenge. Senate Majority Leader John Thune has decided changing the subject is the best response, forcing passage of a revised budget resolution that would fast track a reconciliation bill providing tax cuts and a debt limit increase. The budget instructs House committees to cut spending by $1.5 trillion over 9 years, but Senate committees would only have to cut spending by a few billion. It pretends about $5.5 trillion in tax cuts and increased borrowing costs won’t increase the debt.
President Trump’s tariff precipitated vast losses in global equity markets, erasing trillions of dollars of value. The pretense that tax cuts won’t increase deficits may spook bond markets later this summer, assuming the plan is enacted into law.
The new Trump tariffs, which take effect next week and do not require congressional approval, represent a gamble that the President’s economic instincts are better than everyone else’s. It rests on contradictions: tariffs will force the world’s manufacturers to relocate to the United States, yet taxes on imports will increase revenue to the U.S. Treasury; the policies will not change, yet trading partners will seek concessions and not retaliate. The contradictions create uncertainty, arresting global investment and boosting recession forecasts.
Rising uncertainty about tariff and fiscal policy caused the Federal Reserve to pause interest rate cuts, adopting a wait-and-see posture to assess risks to economic growth and the labor market. Last week’s developments probably increase the Fed’s caution, postponing future interest rate action.
