Macro Minute: Week of July 14, 2025
“I don’t know the future. I didn’t come here to tell you how this is going to end. I came here to tell you how it’s going to begin.”
Neo from The Matrix
I chose to start with this quote because we are beginning to get clarity from the market’s perspective on a few critical areas. The first half of the year was a world full of uncertainty. I think we can now begin to look at things and make some educated guesses as to how the next phase will go. Let’s start with one of the most disruptive policies of the first half of 2025, tariffs. We are starting to understand that there will be a 10% baseline tariff rate on all countries with carve outs and individual trade arrangements that adjust that rate up or down. The latest expectation is for this to increase inflation 0.4 percentage points.
I am writing this on July 1st and as of now, the details of the Big Beautiful Bill (BBB) are relatively set. By the time you are reading this it will probably be passed. While much of the bill is locking in the current tax rates, there are still a lot of changes. I am not going to touch on those changes, only mention that the legislation could add as much as a percentage point to annual GDP growth.
I just want to point out that both developments point to higher interest rates, not lower ones. While that is very disconcerting for the bond market, we just had a major development on this front. Both President Trump and Treasury Secretary Bessent asked, “Why would we borrow longer term at these rates?” In other words, they are likely to finance more of the government debt in shorter maturities and issue less long-term debt. This has big implications. This is almost like a form of Quantitative Easing (QE) done from the Treasury instead of the Federal Reserve. Putting all this together, I would say that they are going to keep things as easy as possible. Add into this the fact that the next head of the Federal Reserve will likely be very dovish, meaning having a focus on an easy monetary policy. In macroeconomic parlance we call this negative real rates. We could have inflation running at a higher rate than the federal funds rate. This is a concern over the next 3-5 years. This would be a world that is the opposite of the last few years where savers have been able to earn good interest on savings with a fed fund rate north of 4%.
We could enter a time when fed funds are below inflation and your savings is losing to inflation. The last time we had sustained negative real rates was after World War II. There are a lot of economic similarities now as to then when looking at the debt picture and interest rates. As we are getting clarity there is more assurance that the world is going to be very interesting for a long time to come.
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