TRUMP’S RETALIATORY TARIFF POLICY (PART 2): PASSING THE “HOT POTATO” TO THE FED

I. U.S. Economic Landscape: Cooling Inflation, Rising Unemployment

The latest data from April 2025 indicates that core inflation in the U.S. continues to cool, edging closer to the Federal Reserve’s long-term target of 2%. However, unemployment has climbed to 4.2%, signaling emerging fragility in the labor market. Although President Trump’s tariff policy has not fueled a rise in inflation, it has contributed to economic strain—particularly in employment.

This puts the Federal Reserve in a precarious position. Maintaining high interest rates could tip the economy into recession, while prematurely easing monetary policy may compromise financial discipline. The Fed is now caught in a policy dilemma—one increasingly shaped not by domestic inflation but by geopolitical trade maneuvers.

US unemployment rate at March 2025

US CPI at March 2025

II. U.S.–China Trade War: A Double-Edged Sword

The intensifying trade war between the United States and China has had multiple adverse effects on the U.S. economy:

• Slowing GDP Growth: Prolonged trade tensions may reduce annual GDP growth by up to 1.5%.

• Higher Production Costs: Tariffs raise the cost of imported materials, compressing corporate profit margins and consumer purchasing power.

• Labor Market Volatility: Export-driven and manufacturing sectors are particularly vulnerable, leading to layoffs and hiring freezes.

While the U.S. Treasury collects approximately $2 billion in tariff revenues daily, the Federal Reserve is left managing the fallout—particularly in terms of employment and credit conditions.

III. The Indirect Strategy: Trump Pressures the Fed to Loosen Policy

Behind the scenes, the broader objective of Trump’s tariff strategy is to pressure the Fed into reversing its Quantitative Tightening (QT) stance and shift toward Quantitative Easing (QE). This transition would serve multiple strategic goals:

• Stimulate Domestic Credit Expansion: Lower interest rates would unlock more affordable capital for businesses and consumers.

• Reduce External Debt Burden: By weakening the dollar, the U.S. can effectively reduce its real debt obligations held by foreign creditors.

• Enhance Geopolitical Leverage: Stronger domestic liquidity allows U.S. banks to absorb government treasuries and reduce foreign dependence.

In short, by weaponizing fiscal tools, Trump is maneuvering to force the Fed’s hand and shift

macroeconomic gears without directly confronting monetary institutions.

FED's Balance sheet trend

IV. Three Key Reasons Why the Fed Must Cut Rates

Given the mounting challenges triggered by the trade war, the Fed is compelled to pivot from restrictive to accommodative policy, both qualitatively (rate cuts) and quantitatively (QE stimulus):

1. Support Economic GrowthLower borrowing costs can stimulate investment, housing, and consumer demand—key drivers of GDP recovery.

2. Stabilize Financial MarketsA dovish stance would help restore investor confidence, enhance market liquidity, and mitigate the risk of systemic shocks.

3. Prevent a Recessionary SpiralPersistently high interest rates amid a weakening job market could lead to stagflation or a full-blown economic downturn. The Fed must act proactively to prevent this.

   
   

Conclusion: When Fiscal and Monetary Policy Become Geopolitical Instruments

Trump’s trade policies have evolved into a broader geoeconomic strategy. They are no longer just about trade deficits or job protection—but are aimed at restructuring global influence and shifting the balance of power.

In this context, the Fed is no longer an independent observer—it has become an active participant. A rate cut is not just an economic adjustment. It is now an inevitability in the face of larger strategic pressures.