Digest | 6 April 2025
- Edward von der Schmidt
- Apr 7
- 3 min read
Updated: 8 hours ago
A look at important themes on the horizon (April 7 - April 11).
The Week Ahead
BAD MEDICINE:
If markets were hoping for a tariff reprieve, think again. President Trump has only edified his position that draconian tariffs are required to eliminate bilateral trade deficits, which he considers to be losses that he holds untenable. He has repeatedly emphasized tariffs' value as a means to compel concessions in trading negotiations, and he has asserted that tariffs are responsible for trillions of dollars of investment commitments in the US. Tariffs have also been put forward as a mechanism for generating necessary revenue to offset the cost of tax cuts and to contain a burgeoning deficit.
Equity markets have held a less sanguine view. The sharpest declines since COVID on Thursday and Friday continued with futures losses accompanied by circuit-breakers in overnight trading to begin the week. The risk grows that collateral calls and forced de-grossing will precipitate selling contagion, even in safe havens should liquidity needs require. While many may hope for a delay in "reciprocal" tariffs effective April 9, a parade of administration officials have sought to make it clear that Trump will not back down. With an EU meeting beginning Monday in Luxembourg where a response to the US will be discussed and voted on Wednesday, the combination of retaliatory announcements and the enactment of tariffs on April 9 as scheduled could make for a difficult week.
HOUSE MONEY:
After addressing an impasse related to proxy voting, the US House of Representatives will take up legislation before its Spring recess begins at the end of this week. Chief among their priorities will be deliberations over the Senate's budget blueprint. The use of current policy baseline scoring - which treats lapsing 2017 tax cuts as though they were already permanent and thus cost-less for budgetary purposes - has already elicited criticism from members of the House eyeing bona fide spending reductions that were lacking in the Senate's plan. In order to pass a comprehensive package through reconciliation, the House and Senate will need to agree on identical frameworks.
With difficult spending decisions kicked down the road, debates in the House will help to define the scope and composition of the "big, beautiful bill". Markets fallout and political risk calculations will also influence the degree to which GOP members of the House and Senate sign on to legislation seeking to reassert Congress' tax authority in the context of tariffs.
MINUTES ARE NOT MINUTIA:
Governor Kugler will speak to Inflation Dynamics and the Phillips Curve on Monday, perhaps presaging the anticipated tension between the Fed's price and employment aims. The Fed is aware of risks to inflation (higher) and growth (lower), but officials have cautioned in unison that more time will be needed to evaluate trade, immigration, regulatory, and fiscal policy measures and their repercussions. Undoubtedly, stagflation would bring the Fed's dual mandate into conflict. Given resilient labor markets to date, equity weakness and even an economic contraction may not be sufficient to force near-term Fed easing in light of more pressing inflation concerns.
Apart from meeting communications and officials' speaking engagements, the FOMC minutes are the best contemporaneous insight available into the Fed's decision process. Released three weeks after the FOMC meeting (in this case, on April 9), the minutes are not a perfunctory recap. In addition to a detailed summary of key financial, economic, and policy discussions, important debates are highlighted. More subtly, the Fed uses its editorial discretion in this summary to emphasize salient points as it seeks to fine-tune its mid-cycle messaging. How the Fed now chooses to characterize its FOMC discussions in March will shed light on its resolve to hold rates in May and June.
Apropos, CPI and PPI figures for March will be released on Thursday and Friday. Absent an unanticipated drop in inflation or employment, expect price pressures to keep the Fed on hold longer than many are prepared for. Only when labor market needs are sufficiently great or the Fed is confident that it will not need to stop and change course will easing recommence.
Good luck,
Edward von der Schmidt