History may rhyme, but the economic drama now unfolding in the United States defies historical reason. When the US Federal Reserve's technocrats collide with an inexperienced and capricious presidential administration, conventional macroeconomic tools quickly become impotent.
In the past, when the US faced acute economic upheaval, the government devised macroeconomic-policy responses aimed at reducing uncertainty, restoring confidence, stabilizing markets, and reigniting investment and consumption. This was true after the 2008 financial meltdown and the 2020 COVID-19 shock. The 2023 run on Silicon Valley Bank did not spiral into a broader crisis precisely because of the government's swift intervention.
But these crises were largely exogenous in nature, arising from the excesses of a poorly regulated financial sector (2008) and a once-in-a-century pandemic (2020). The US economy's current travails, by contrast, can be traced directly to the president, who has emerged as the economy's most destabilizing factor. In this context, traditional policy instruments, honed over decades of economic management, are not fit for purpose.
Until late last year, the US economy was growing at a healthy clip. Following Donald Trump's victory in the November presidential election, moreover, both stock markets and the US dollar surged, as investors sought to profit from his promised tax cuts and deregulation. Markets seemed confident that the economy would be Trump's top priority, and that his more extreme pledges of disruption were merely campaign bombast.
No such luck. Since Trump's inauguration on January 20, volatility has become the defining feature of US policy. Never was this more apparent than on April 2, when Trump announced a sweeping “reciprocal” tariff regime, which involved the imposition of ultra-high tariffs on countries running trade surpluses with the US. Almost immediately, stock markets plummeted, bond yields spiked, and the dollar depreciated.
Within 24 hours of the reciprocal tariffs taking effect, Trump announced a 90-day “pause,” during which new trade agreements – more favorable to the US – should be negotiated. The idea that the Trump administration will be able to strike dozens of trade deals within such a tight timeframe is wishful thinking, at best. Trump says he will reinstate the tariffs on any country that fails to come to terms with the US, but it is impossible to know what will actually happen when time is up.
Trump's unpredictability extends far beyond trade. In the international arena, Trump has floated bizarre aspirations to assert US sovereignty over Canada, Greenland, and the Panama Canal. He has also reversed America's stance – and upended transatlantic unity – on the Ukraine war, berating Ukrainian President Volodymyr Zelensky in the Oval Office and voting with Russia in United Nations resolutions on Ukraine.
Domestically, Trump's Department of Government Efficiency (DOGE), led by Elon Musk, has carried out sweeping purges of civil servants, unsettling the federal bureaucracy while delivering minimal budgetary savings. Most alarming, Trump has petitioned the Supreme Court to permit him to dismiss the heads of independent agencies, clearing a legal path to oust Fed Chair Jerome Powell – a move that would erode the central bank's independence and severely undermine global confidence in the US dollar.
For Trump, unpredictability and brashness are essential to any negotiation and, indeed, to leadership. The problem, of course, is that expectations form the basis of investor confidence. Already, uncertainty about the future has led to a sharp, simultaneous decline in the value of equities, bonds, and the dollar.
But here is the most worrying part: since Trumpian uncertainty is endogenous, it is impervious to macroeconomic remedies. No interest-rate cut or fiscal injection can neutralize the chaos emanating from the Oval Office. Even if fiscal or monetary measures temporarily calmed the markets, Trump might see this as a green light to double down on aggressive trade policies and institutional disruption.
Given this, the Fed should avoid acting aggressively to offset Trump-induced volatility. To be sure, there is a limit to what the Fed could do, even if it tried: it can print money to restore liquidity, but it cannot print institutional credibility. Already, global investors are demanding higher premia to cover political risk. Nonetheless, any stabilization today – however limited – may sow the seeds of greater instability tomorrow.
Whatever the Fed does, more Trumpian chaos is virtually guaranteed. After all, when Trump returned to the White House in January, he brought reinforcements: a team of loyalists willing to pursue whatever extreme measures he commands. Unless something changes, one can expect firms to delay investment, households to reduce spending, and global investors to price a permanent “Trump risk premium” into US assets – all of which will erode the foundations of US economic dynamism and resilience.
This has important implications for the world's second-largest economy. Even as Trump paused reciprocal tariffs on other economies running trade surpluses with the US, he maintained – and subsequently increased – tariffs on imports from China. Now, China's efforts to stimulate domestic demand are more important than ever. Beyond stabilizing the Chinese economy, stronger domestic demand would help to improve China's economic relationships with the rest of its trading partners, many of which worry that Trump's tariffs will divert exports to their markets.
Fortunately, Chinese policymakers seem to be well aware of the stakes. In its March “work report,” China's government established “comprehensively expanding domestic demand” as its primary task for 2025. With Trump's unpredictability exceeding expectations, China is likely to introduce even more robust policies to achieve this goal.
Copyright: Project Syndicate, 2025.www.project-syndicate.org
