Trump Trade War: Tariffs, Debt, and Fed Tensions Fuel Market Instability

Decades of Easy Money and the Roots of Fiscal Imbalance

The seeds of today’s inflation and debt crisis trace back to the early 2000s. After the Dotcom bubble, the Federal Reserve, under Alan Greenspan, adopted a looser monetary stance to reignite growth. This move inflated the subprime mortgage bubble and led directly to the 2008 financial crisis. In response, Ben Bernanke and later Janet Yellen maintained near-zero interest rates for almost a decade, further inflating asset prices and fueling record federal debt levels.

The post-2008 era of ultra-loose monetary policy laid the groundwork for structural imbalances. The 2017 Tax Cut and Jobs Act increased deficits, while large-scale bipartisan COVID-19 stimulus measures further deepened the fiscal shortfall. Along with the Fed’s easy money policies, this situation led to rising inflation and increasing government debt.

Tariffs, Inflation, and the Fed’s Dilemma Amid Trump Trade War Pressures

Since inflation remains elevated, many economists argue that the solution lies in reducing spending and shrinking deficits. However, the growing calls for rate cuts are adding pressure on the Fed to ease policy, which could risk a repeat of 1970s-style inflation.

However, the Fed does not face a clear win scenario. If it holds rates steady, it may trigger political uncertainty. On the other hand, cutting too quickly could increase the risk of inflation. A modest 25-basis-point cut appears to be the most balanced approach. Meanwhile, the unemployment rate remains at 4.3%, suggesting the economy is slowing rather than collapsing.

Trump-era trade policies have also contributed to inflation through tariff pass-through effects. While many firms have absorbed the impact so far, consumer prices are now beginning to reflect the higher import duties. Powell has cautioned that although these effects may be temporary, the risk of entrenched inflation remains significant. Fed officials must now balance rising service-sector inflation with growing labour-market concerns. The inflation expectations are surging in 2025, as seen by the chart below.

Miran Confirmation and Trump’s Growing Influence

Senate Republicans are moving quickly to confirm Stephen Miran to the Federal Reserve Board of Governors, potentially as early as Monday. The timing appears aimed at allowing Miran to participate in this week’s Federal Open Market Committee (FOMC) meeting, where a key interest rate decision is expected. Miran’s confirmation could influence the direction of monetary policy, especially as the Fed faces pressure to cut rates despite inflation remaining above its 2% target.

Moreover, Christopher Waller is widely viewed as a contender to replace Powell and has voiced support for multiple rate cuts. However, not all voices at the Fed agree. Kansas City Fed President Jeff Schmid opposes any cuts for now, while Atlanta’s Raphael Bostic believes just one cut is appropriate in 2025. St. Louis Fed President Alberto Musalem advocates a balanced policy approach, warning against placing too much emphasis on either employment or inflation in current decisions.

Market Instability Grows: Overbought Stocks and Debt Risks in the Trump Trade War Era

While monetary policy dominates headlines, equity markets are sending their own signals. The S&P 500 currently trades at 23.4 times projected earnings, a valuation level not seen since the Dotcom bubble of 2000. Historically, these elevated valuations have preceded significant corrections.

The long-term outlook for the S&P 500 remains strongly bullish. However, the index is currently trading within elevated levels of an ascending broadening wedge pattern, suggesting that it is at extreme overbought levels. Despite this, bullish momentum continues to push the index higher.

The technical setup shows that the index has gained nearly 200% from the bottom of the wedge formation. This sharp rally suggests that the S&P 500 is now nearing key resistance within the pattern. As the index approaches the resistance of the ascending broadening wedge pattern, the risk of a strong correction may increase.