The Trump Administration’s ‘Have Cake And Eat It’ Economic Agenda

Trump has a stated desire to reduce the deficit, with Treasury Sec Bessent on record as saying that the issue is not with raising revenue, but with excessive government spending. So, the Admin essentially abandon DOGE, with Musk and most of his staff having now gone back to the private sector, and give up on those cost-cutting efforts.

Trump has also stated that he wants to significantly cut US income taxes, using tariffs to replace lost revenue via a newly-established ‘External Revenue Service’. However, almost every time that significant tariffs have been imposed, they have been reversed again in very short order, raising some revenue, but inevitably nowhere near enough to even make a dent in what would be needed to substitute for income tax.

Then, there’s the desire for lower crude prices. While benchmarks have now resumed their downwards trend, intervening in, and escalating, tensions in the Middle East was, to say the least, a rather unorthodox way to achieve such an aim.  

Moving on, we have perhaps the biggest desire of them all, to engineer lower borrowing costs, and a fall in Treasury yields, in an apparent attempt to reduce the interest burden that, for now at least, is only moving in one direction – higher!

There has been, frankly, a ridiculous number of attempts to engineer a fall in Treasury yields, almost all of which centre around a bullying of Fed Chair Powell, and an increasing clamour from both Trump, and various other Admin officials, for Powell to deliver immediate, and significant, cuts to the fed funds rate.

These efforts, though, are self-defeating. Efforts to erode the Fed’s policy independence, either via calls for rate cuts, or through reported plans to appoint a ‘shadow’ Fed Chair in the autumn, are simply serving to accelerate the already-significant outflows from Treasuries. This selling pressure, naturally, results in higher yields across the curve, most obviously in the deficit-sensitive 10-30 year segment of the curve.

In addition to this, one must consider what could happen in the unlikely event that, in the short-term, Trump actually got the rate cut that he seems so desperate for. Given the significant degree of upside inflation risk that remains, and the relatively stable nature of the labour market, delivery of such a cut runs the risk of inflation expectations becoming un-anchored, in turn sparking an even more significant sell-off across the Treasury curve, and probably seeing the 10- and 30-year yields each north of 6% in relatively short order.

So, barring the first-order conclusion that the Trump Admin, and its economic policymakers, don’t seem to endorse the idea of joined-up thinking, what is the takeaway here?

Perhaps obviously, it seems that the deafening din of noise from Washington DC on this range of issues is likely to continue for the foreseeable future, with the noise/signal ratio set to continue ratcheting ever-higher. From a market perspective, especially in the FX and FI complexes, this is likely to lead to volatility remaining at a relatively high level, as participants struggle to deduce which policy positions are likely to be taken, and have great difficulty in accurately discounting a concrete economic outlook. Finally, and perhaps most importantly, as the institutional credibility of the US continues to be eroded, capital outflows are likely to continue, leading to a slow but steady weakening of the greenback, as international and reserve allocators increasingly find a home elsewhere. Importantly, from a much longer-run perspective, once these funds have fled, they shan’t be returning in a hurry.

Hence, so long as the Trump Admin continue with their ‘have cake and eat it’ economic agenda, the path of least resistance leads lower for the USD.