Trump's Unconventional Economic Policy: A Threat to Global Markets

Strategic Insights -

President Trump's recent stance on using monetary and trade policies to manage the U.S. government's debt is a significant departure from conventional economic practices. He seeks to "fiscal capture" monetary policy, prioritizing government interests over economic conditions, which could lead to "fiscal dominance." This approach may result in higher inflation, higher long-term interest rates, and a steeper yield curve. Traditionally, the job of monetary policy is economic stabilization, but Trump's unconventional approach could have far-reaching consequences for global markets.

Key Takeaways:

  • Trump's proposal to use monetary policy to reduce the government's debt burden is at odds with traditional economic practice, which prioritizes economic stabilization over fiscal goals.
  • The desire for "fiscal capture" of monetary policy could lead to "fiscal dominance," causing higher inflation and higher long-term interest rates.
  • The traditional aims of trade policy, such as re-shoring manufacturing and negotiating concessions with trade partners, may be compromised if tariffs are used as a major funding source for the U.S. government.
  • The White House economists project that tariffs will raise about $2.8 trillion over the next decade, a key factor in their deficit projections.
  • The resulting risk is that high tariffs could stick around longer and long-term interest rates might spike higher if fiscal dominance prevails.
  • The Fed's profits or losses are not a goal, but rather a downstream effect of policies set in service of economic goals.
  • In normal times, it's a recipe for muddled policy, or worse, for the Fed to prioritize funding the government on favorable terms.

Statistics:

  • Trump's proposed interest rate of 1% would save the U.S. government $1 trillion per year in interest costs.
  • The Fed has net losses in the last couple of years, cited by Trump's budget director, Russ Vought.
  • The White House economists project that tariffs will raise about $2.8 trillion over the next decade.
  • The 30-year yield may rise relative to short-term yields if the "fiscal capture" narrative is uncovered.
  • The U.S. yield curve may steepen further due to the risk of higher long-term interest rates.

Sources:

  • Axios: (https://www.axios.com/economy)
  • Mike Konczal: (https://mikekonczal.substack.com/p/the-four-data-sleightsofhand-behind)
  • White House: (https://www.whitehouse.gov/wp-content/uploads/2025/03/The-One-Big-Beautiful-Bill-Legislation-for-Historic-Prosperity-and-Deficit-Reduction-1.pdf)
  • Macquarie strategists: Thierry Wizman and Gareth Berry (note)