By Michael Every of Rabobank
Again, economic statecraft eclipses the market’s desire to just talk economic policy. While none of the big central bank decisions yesterday produced headline surprises (the BOC cut 25bps, the Fed held, and the BCB raised 100bps), statecraft was deeply entwined in what they said.
Even before we got to their meetings, the Financial Times reported a 1920’s-style headline that the Bank of England was bleeding gold as bullion floods to the US to front-run any potential tariffs. Gold bugs will point to Trump inflation risks and nod; but gold was running to the US and away from the UK (where Chancellor Reed tried to sell the markets on her go-go growth policies just months after what was seen by business a slow-slow budget).
The BOC dropped forward guidance because of the risk of 25% US tariffs in days: and while it made the statecraft-blind statement that ‘inflation is over’, the Governor implied if tariffs happen, the Bank will have to help… but by cutting or hiking into a spike in inflation and a deep recession (according to DeepSeek)?
The Fed said asset prices were high while rates were way above neutral(!) but isn’t in a hurry to cut because it has to wait to assess Trump policies. (Our Fed watcher Philip Marey’s take is here: he has now pushed back his last presumed cut in this cycle to June.) President Trump unleashed a tirade against the Fed on social media: he proposes the Fed disposes rate cuts.
However, the White House will approve of Powell saying the Fed has no problem with US banks helping their customers with crypto, and not being averse to innovation. Or more digital asset bubbles? Or economic statecraft, which will be joined at the hip given the White House has already banned all potential CBDCs as rivals to ‘Made in America’ digital assets?
To be fair to the Fed, economic statecraft is pushing the envelope for conventional economists and thinkers.
- In fiscal policy, we see huge, planned tax cuts and spending cuts. The White House may now challenge the 1974 Impoundment Act for undermining the executive’s ability to ensure fiscal responsibility, arguing it should include the power to impound funds “exceeding legislative intent” or “conflicting with constitutional duties” if they undermine national security via fiscal waste. The argument is also that the President should be able to fire civil servants more easily and curb the pay and spending of independent agencies. In other words, the White House wants to upend “The President proposes, and Congress disposes” by adding, “and the President opposes.”
- On energy, the best thinkers say if the US uses the Defence Production Act, then maybe oil prices can come down significantly, as the Secretary of the Interior has just been added to the National Security Council because his remit covers mining and critical minerals.
- On trade, Commerce Secretary nominee Lutnick backs universal tariffs to return manufacturing to the US but said Mexico and Canada can avoid 25% tariffs if they act quickly: in the Canadian case, by opening their protected domestic agri market to US farmers. (And note lower energy prices would moderate any inflationary impact from higher tariffs.)
- On labor, President Trump will send up to 30,000 illegal immigrants to Guantanamo Bay, which should incentivise the end of what he sees as the national security problem of an open border. (And note that firing lots of federal employees might fill some, if not all, of any gaps in the labour market that open up as a result of the immigration crackdown.)
- On FX, that policy mix would imply a much stronger dollar, but lower US inflation (and so lower US rates?) might moderate the impulse somewhat; then again, the buck --and only the buck-- would be tied into a US/western crypto network to support its usage.
That’s a way Trumpian economic statecraft might join up; central banks need to think about it a lot rather than focusing on economic policies like tariffs in isolation.
Then again, there are other ways things might turn out if the statecraft toolkit doesn’t mesh well that would produce very different macro and market outcomes, as we have been stressing in ‘The Year of Living Dangerously’ presentations for many months now.
On which note, yesterday saw EU Commission President von der Leyen set out a new Competitiveness Compass based on the conclusions of the Draghi Report that includes: ‘AI Gigafactories’; ‘action plans’ for advanced materials, quantum, biotech, robotics, and space technologies; an EU Start-up and Scale-up Strategy; a ‘roadmap’ for decarbonisation and competitiveness; a Clean Industrial Deal to promote clean tech and new circular business models; an Affordable Energy Action Plan; an Industrial Decarbonisation Accelerator Act; tailor-made ‘action plans’ for energy intensive sectors; Clean Trade and Investment Partnerships; new public procurement rules to perhaps allow introduction of a European preference for critical sectors and tech; cutting at least 25% of the administrative burden for firms and 35% for SMEs; a Horizontal Single Market Strategy to modernise the EU governance framework; a European Savings and Investments Union to create new savings and investment products to ensure seamless investments flow across the EU; a Union of Skills, and a Competitiveness Coordination Tool to ensure better coordination of policies at both EU and national level.
Frankly, I’m tired just typing an edited version of it, but what one sees is an expensive, unfunded, hyper-ambitious, acronym-tastic, top-down, PowerPoint EU industrial policy that will require radical reforms and constant monitoring and policing… while somehow cutting paperwork and increasing dynamism; and which currently has almost no buy-in from EU national governments. The Horizontal Single Market Strategy and European Savings and Investment Union alone are tectonic in their implications.
As Draghi warned, if this doesn’t happen, Europe faces “slow agony” – but maybe not so slow given developments elsewhere. Yet if it proceeds, this cumbersome EU economic statecraft model will go head-to-head with China’s hyper-focused abilities and a US Hamiltonian policy of massive deregulation and upstream market intervention behind a tariff wall.
As a result, ECB President Lagarde will today join the BOC in cutting 25bps today, and them and the FOMC in proposing there is extreme uncertainty about the outlook, while also stressing the “if nothing geopolitical happens, then X Y Z” scenario.
But allow me to propose that is no way to make forecasts – at least not of the realistic risk parameters ahead. Central banks, and everyone in markets, need to be aware of the Great Game of Global Trade being played; of economic statecraft; and of Grand Macro Strategy.
