Some Like It Hot. I am not referring to the acclaimed 1959 comedy crime film starring Marilyn Monroe, Jack Lemmon and Tony Curtis. I am referring to the Trump Administration policy for the U.S. economy.
Inflation is hovering between a 2.5% and 3.5% rate based on the dashboard of inflation measures from the Federal Reserve Bank of Atlanta. The current U.S. unemployment rate of 4.3% is still near the low of this economic cycle. The Atlanta Fed GDPNow metric is currently sitting at a 3.1% a rate. All else equal, this trifecta of data points would not call for easy fiscal policy and easy monetary policy. And yet here we are.
U.S. fiscal policy is expansionary, with the fiscal deficit running above 6% of GDP, a level normally associated with recessions. As for monetary policy, the Trump Administration is pressuring the FOMC to run a looser monetary policy, despite the aforementioned inflation, labor market and economic growth data, no crisis in credit markets and the banking sector and no large price declines in most real estate markets.
While I have no policy insight and no crystal ball, it is possible the combination of easy fiscal policy and the pressure for easier monetary policy is an implicit acknowledgement by the Trump Administration that negative second round impacts of their tariff policies are on the horizon. The immediate impact of the increase in tariffs in the U.S. was an increase in price for traded goods and some modest demand destruction. The upcoming second round impact may be more onerous, in the form of beggar-thy-neighbor policies that are likely to result in a decline in global economic activity and less liquidity within financial markets. Since the U.S. dollar is the world’s reserve currency, the antidote may have to be easier U.S. monetary policy. Time will tell.
1. Despite the imposition of tariffs in April, measures of inflation are generally below the level of last year, though the rate of change year-over-year of the Consumer Price Index has been ticking up since May.
Source: Federal Reserve Bank of Atlanta
Source: Federal Reserve Bank of Atlanta
2. The unemployment rate remains near this cycle’s low.
3. Projections of third quarter economic growth have been moving higher, not lower.
4. The concern lies with the current composition of GDP growth. It is low quality.
Both consumption growth and investment growth remain weak compared to recent history. GDP growth is being driven by the high level of fiscal spending and the decline in imports, neither of which are sustainable and don’t create a virtuous cycle of higher incomes and higher productivity.
Source: Washington Monthly, https://washingtonmonthly.com/2025/08/04/the-u-s-economy-is-stumbling/, based on initial estimate of 2q2025 GDP
5. Global equity market investors remain unconcerned about tariff impacts and other global economic challenges.
Equity markets had another strong month in August. Year to date, non-U.S. equity markets continue to outperform the U.S. equity market, a reversal of the trend over the last fifteen years.
