Navigating a knife's edge economy

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Quick Fix
As Federal Reserve policymakers gather today to make their latest interest rate decision, the economy is weakening — but not enough to prompt Chair Jerome Powell to lower borrowing costs.
If the Fed stands pat, as is widely expected, it will undoubtedly rankle President Donald Trump, who has been pressing Powell in recent days to drop interest rates by a full percentage point.
But a particularly telling signal — for Trump and for markets — will come alongside the Fed's decision: officials' quarterly forecast. June's report, known as the Summary of Economic Projections, will be the first time central bank policymakers have weighed in on the potential path for rates, growth and inflation since Trump's sweeping new tariff regime announced April 2.
The story told by those forecasts could influence the reaction from Trump, who has also shown renewed interest in thinking about who will replace Powell as chair when his term ends next year.
That said, nobody can predict with any certainty how tariffs will feed through the economy this year. Just ask Stephen Miran, Trump's chief economist.
'Folks that do have precise forecasts are kind of silly and kidding themselves about how much certainty they could possibly have,' he told your MM host on Friday, citing continued uncertainty about where the tax bill will land and how trade deals will shake out.
For now, though, Miran said there's no evidence that tariffs are stoking inflation or causing a 'substantial drag' on the economy.
The narrative told by economic indicators is mixed. Inflation has continued to cool, and unemployment is holding around 4.2 percent. U.S. retail sales data out Tuesday showed consumer spending has declined, but that's also coming off a pre-tariff buying spree earlier this year. Sales were still up 3.3 percent compared to May 2024.
Industrial production declined modestly in May, according to the latest Fed data, and the Fed's own rate policies are pinching in some areas: a gauge of U.S. homebuilder sentiment fell to its lowest level since December 2022.
Don't forget the added risk of the conflict between Israel and Iran, which has caused oil prices to jump. All of that paints a muddy picture.
Still, from the Fed's perspective, signs of resilience could add to their resolve to hold rates steady for the time being. After all, a stronger labor market could make it easier for companies to raise prices in the face of tariffs because workers have more spending money.
'Let's say we don't get a recession and the labor market is OK,' said Torsten Slok, chief economist at Apollo Global Management. 'In that case you will have even more upside pressure on inflation.'
'The starting point for inflation is really important,' he added. 'If the starting point was 1.5 percent, it would've been much more manageable to have a trade war.'
Your host also has a new 'Capital Letter' column out this morning that explores Miran's vision for how Trump's tariffs will ultimately lead to fairer trade.
'At the center of his argument is the idea that the U.S., as the dominant buyer of the world's goods, will ultimately have enough leverage to make foreign trading partners eat the cost of tariffs, leading to more revenue and supply chains that are more aligned with U.S. interests,' Victoria writes.
'Foreign manufacturers will have to lower their prices to accommodate tariff rates, Miran believes. If they don't, then U.S. importers will turn to factories in other markets rather than absorbing the cost of tariffs themselves.'
For now, that's not really how it's playing out. Debates are raging across the world about how to divide the tax burden of tariffs in a way that is least disruptive, and in many sectors, that looks like: 'factories take a third, the U.S. corporate takes a third, and then the consumer takes a third,' according to Ajit Menon, U.S. head of global trade solutions at HSBC, the largest trade bank by revenue.
But Miran's argument is that these dynamics will take some time. 'In the long run, this tax incidence logic absolutely is going to hold,' he said. 'In the short run, is there going to be volatility in prices? It's absolutely possible.' Pros can read the Q&A here.
IT'S WEDNESDAY — What should we ask Chair Powell? Send ideas to vguida@politico.com.
Programming note: We'll be off this Thursday but will be back in your inboxes on Friday, June 20.
Driving the day
The American Enterprise Institute hosts an event on U.S. trade and the global economic outlook at 10 a.m. Speakers will include Jason Furman, former top economic adviser to President Barack Obama, Goldman Sachs Chief Economist Jan Hatzius, AEI Senior Fellow Desmond Lachman and former longtime Treasury official Mark Sobel … HUD Secretary Scott Turner speaks at the Exchequer Club at 1 p.m. … The Federal Reserve will make its interest-rate announcement at 2 p.m. … Fed Chair Jerome Powell's press conference will follow at 2:30 p.m. …
GENIUS leaves the stable — The Senate passed landmark cryptocurrency legislation on Tuesday that is aimed at creating the first-ever U.S. regulatory framework for digital tokens known as stablecoins that are pegged to the value of the dollar, our Jasper Goodman reports.
But the bill faces an uncertain future in the House, where Republicans are weighing how much to change the Senate legislation and whether to package it with a market structure bill.
Timing for the tax bill — A host of concerns from diverse pockets of the GOP are threatening Majority Leader John Thune's grand plan of winning Senate passage of the GOP tax bill by July 4, our Benjamin Guggenheim and Jordain Carney report.
Are you listening, bond market? — The Federal Reserve will hold a board meeting next week to take up a proposal aimed at easing capital requirements for the nation's largest banks, our Michael Stratford reports. Treasury Secretary Scott Bessent has called the changes to the backup capital rule, known as the supplementary leverage ratio, a top priority for the Trump administration, arguing they would boost liquidity in the Treasury market and spur demand for U.S. government debt.
'The White House Office of Management and Budget is already reviewing proposals submitted by the Fed's peer bank regulators, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency,' Stratford reports. 'The Fed has yet to send its proposal to OMB, according to the office's website.'
MM sidebar: Your host remembers back in 2021, when the Fed said it would consider changes to the SLR 'shortly.'
Tariff update — Two companies in Illinois that are suing to block Trump's tariffs on dozens of countries are asking the Supreme Court to fast-track their challenge, our Ari Hawkins reports. A ruling against the president could permanently block Trump's ability to use emergency powers to impose tariffs.
Employee of the year — Dave Lebryk, a longtime top career official at the Treasury Department who resigned earlier this year amid a clash over DOGE's access to the payments systems, was honored Tuesday night by the Partnership for Public Service as Federal Employee of the Year.
Former Treasury Secretary Tim Geithner, now chairman of Warburg Pincus and with a much lower public profile of late, gave unusually direct remarks at the event, according to remarks provided to MM: 'In honoring Dave you are honoring one of the foundational strengths of the American government, a tradition in which talented people devote their careers to trying to bend the arc of policy toward competence, to defending the public interest, to serving as a check on damaging ideas, and to trying to talk our leaders into better ideas,' he said. 'This is a tradition we should honor. It's a tradition we should preserve and strengthen.'
Another former head of Treasury, Janet Yellen, also spoke: 'Dave has been a quiet force at Treasury for nearly 40 years,' she said. 'He started as a presidential management intern and rose through the ranks to become our fiscal assistant secretary—the highest-ranking career official at the Department. That title doesn't begin to capture his impact.'
On The Hill
Big beautiful price tag — The tax package House Republicans passed last month would increase the U.S. deficit by $2.8 trillion over a decade when considering economic effects, according to the Congressional Budget Office, our Jennifer Scholtes reports.
'CBO did find that the legislation would modestly boost economic growth over a decade, by 0.5 percent on average,' Scholtes writes. 'But those effects would be swamped by the costs of higher interest rates, forecasters found, which would boost payments on the national debt by an estimated $440 billion over that time. Over five years, inflation would increase 'by a small amount' because of the bill, the budget office predicts.'
Crapo goes big on permanence — Senate Finance Chair Mike Crapo is aiming to make a slew of provisions in the GOP tax bill permanent — not just business breaks for things like research and investment expenses. An expanded Child Tax Credit, a new charitable break, the New Markets Tax Credit program, Opportunity Zones and others would all become a fixture of the code in his plan, our Brian Faler reports.
The Economy
Amazon eyes AI-related workforce cuts — Amazon CEO Andy Jassy in a note to employees Tuesday said the company, one of the largest U.S. employers, plans to reduce its workforce in coming years because artificial intelligence will eliminate the need for certain jobs, WSJ reports.
Bessent on the pods — A Treasury analysis of labor market data shows that Trump is the only president since Richard Nixon to see positive real wage growth for non-supervisory workers in the first five months of his presidency, Treasury Secretary Scott Bessent told the New York Post in a podcast that will air on Wednesday.

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