….not well

Daily update

Financial markets expected a significant tax increase from US President Trump. Yesterday’s reaction shows the tax increase was worse than anticipated. US dollar weakness is telling. We often hear that when the US sneezes the global economy catches cold. This is not the US sneezing. This is the US cutting off its own arm. The self-inflicted economic cost naturally weakens the dollar. Federal Reserve Chair Powell speaks today on the economic outlook.
It will take time for US consumers to experience price increases (Canadian and Mexican exemptions mean fresh food is not taxed further). Perceptions of economic risks will remain polarized—not all news media are covering this the same way.
Broader economic risks around policy competence and uncertainty remain. There is circumstantial evidence of a lack of (human) forethought. Taxing things the US does not produce (bananas) creates confusion about policy objectives. Trump hinted at possible “phenomenal” deals, and there are moves in Congress to override the tariffs—this uncertainty likely delays key economic decisions by companies and consumers.
For now, US recession risks have risen. Over the longer term, effective tariff rates should fall somewhat. Rerouting supply chains, shifting demand patterns, and the political and economic pressure on Trump to retreat should reverse some of this damage.