Josh Barro, a contributing Opinion writer, hosted a written online conversation with Lael Brainard, the director of the National Economic Council from 2023 to 2025 and a former vice chair of the Federal Reserve, and Conor Sen, a columnist for Bloomberg Opinion, to discuss the risks to and uncertainty in Donald Trump’s economy.
Josh Barro: It’s been more than two weeks since “Liberation Day,” the day Trump announced massive tariffs that sent global financial markets reeling. As it stands now, the S&P 500 is down about 14 percent from its peak in February.
Why has this news — tariffs that are both higher and more uncertain than expected — disrupted the markets so much?
Conor Sen: Markets and business leaders came into the year with high expectations for the Trump administration — people were saying things like “the most pro-business administration of all time.” Markets were hoping for tax cuts and deregulation, but what we got out of the gate were spending cuts and fiscal uncertainty created by the Department of Government Efficiency, and then a level of tariffs much higher than anyone expected. The tariff announcement has shocked consumer and business confidence, and the high expectations the investor and business community had in the administration have been dashed. The trust has been shattered.
Lael Brainard: The 10 percent base-line tariff for all countries, the 25 percent sectoral tariffs for cars and other products, the enormous tariffs against China mean huge increases in prices for American working families — for clothing, shoes, cars, housing. These are levels similar to the Smoot-Hawley Tariff Act of 1930, and they are going to hurt families and businesses, costing them $3,000 or more a year, scramble business supply chains and hit the economy. That is a huge negative shock.
Barro: Trump’s team has claimed the hit to the stock market is all part of the plan: that Trump’s policies are shifting economic benefits away from Wall Street and toward Main Street. But there’s also been trouble in other markets: U.S. Treasury bond yields have risen, and the dollar has weakened compared with other major currencies. This is unusual. Normally, when the markets become more uncertain, the dollar will strengthen and U.S. Treasury yields will fall as investors try to move into the safest assets: the dollar and U.S. government debt.
Why is this time different?
Brainard: It is extremely unusual for the dollar to fall and U.S. Treasury yields to jump at the same time. The tariff announcements coming from the White House are raising questions about whether it is a smart bet for global investors to have so much of their money in U.S. assets. What people in the markets have been calling American exceptionalism — which reflected the perception that the American economy was the envy of the world — is being revisited.
Sen: American exceptionalism was a crowded trade coming into the year. Foreigners owned a lot of U.S. assets in their portfolios. The tariff announcement led some to pare back those bets.
Barro: Is this maybe intentional? The dollar’s role at the center of the global financial system creates what is often called the exorbitant privilege: The United States enjoys a stronger dollar and lower interest rates because financial actors all over the world need to buy dollars and dollar-denominated assets to conduct business. But some economic thinkers around Trump have the unorthodox view that this is actually a burden — as a senator, JD Vance wondered if it could be considered a “resource curse” — because it makes U.S. exports too expensive, and in their view undermines our manufacturing base. Is this some sort of strategy to make us into more of an exporting country?
Brainard: If so, it is not a smart strategy. Hitting working families with huge price hikes, raising the risk of throwing the economy into a recession, increasing interest costs on the U.S. debt at a time when the administration is planning to issue trillions of dollars of additional debt for tax cuts seems like a self-inflicted mistake.
Sen: In a vacuum, a weaker U.S. dollar might support U.S. exports. The problem is that putting tariffs on not just final but intermediate goods as well raises the cost of production for U.S. manufacturers. So even if the dollar were to fall 10 percent, because of the new tariff base line U.S. manufacturers will be less competitive in global markets than they were pre-tariffs.
Barro: How worried are you that this crisis will lead to the dollar’s dislodgment as the world’s reserve currency, and what would the consequence be for the U.S. economy if that happens?
Brainard: It would take an enormous permanent shift in the global landscape to fundamentally alter the dollar’s reserve currency status. I hope that will not happen because our institutions remain strong. But we cannot take that for granted.
Sen: The question I’d have would be: And replace it with what? It’s easy to see how disruptive and disconcerting the actions of this administration are with respect to global finance, but much harder to come up with an obvious alternative system.
Barro: Interest rates have been volatile. As the president’s tariff announcements started disrupting financial markets, rates on U.S. government bonds were initially falling, and Treasury Secretary Scott Bessent took something of a victory lap about this, saying this would lead to lower mortgage rates and that this was how the administration was shifting benefits from Wall Street to Main Street. Then that effect reversed, and interest rates started rising as stocks continued to fall.
Now the president has reiterated his call for the Federal Reserve to cut short-term interest rates, in the hopes that this would cause long-term rates to fall again. Would that work?
Sen: The question when it comes to longer-term rates (like 10- or 30-year yields) is whether investors would see rate cuts as because of judicious monetary policy or pressure from the president. If it’s the latter, a loss of confidence in U.S. assets could push longer-term rates higher.
Brainard: The administration may say the Fed should cut rates. But they could regret it if it leads people to expect that the Fed doesn’t have a tight grip on inflation. Congress assigned the Federal Reserve a basic responsibility of keeping inflation low and employment strong. When the Federal Reserve is doing its job, that’s good for American working families and that is good for Main Street. The Fed chairman, Jerome Powell, made the basic point last week that the high tariffs imposed by the White House will raise prices for businesses and consumers and contribute to a slowdown in the economy — and that could put Fed policy in a tight spot.
Barro: Lael, can you explain more about that tight spot? Powell called it a “challenging scenario” — the issue is that the tariff policy could cause both a weaker labor market (which calls for lower interest rates) and inflationary pressure (which calls for higher ones)?
Brainard: The Fed has two key objectives: keep inflation low and support strong employment. Until there is greater clarity on how those two opposing forces — tariffs raising inflation while slowing employment — are likely to play out, it puts the Fed in a wait-and-see posture.
Barro: The president said last week that Powell’s departure “cannot come fast enough.” How are the markets likely to react if the president purports to terminate the Fed chair — at a time when there is a pending Supreme Court case that could imperil the legal restrictions on him doing so?
Brainard: Even if the administration had the power, most people think it would be a real mistake for the administration to terminate the Federal Reserve chair before the end of the statutory term (in May 2026). That is because it could lead to even more of a spike in Treasury yields — which is what caused the White House earlier this month to pull back many tariffs — if it led to the perception that the Fed’s ability to control inflation would be compromised. And most observers don’t actually think they have the power to do so.
Sen: Guessing the direction of interest rates in that scenario is hard, but higher market volatility would be a given. Still, it would take Senate confirmation to appoint a new chair, and the chair is just one of many votes on the Fed. In other words, even if Trump were able to successfully fire Powell, there are still institutional safeguards in place against a president unilaterally getting the monetary policy he wants.
Barro: The overall effect of Trump’s moves has been to inject a tremendous amount of uncertainty into the economy — businesses cannot predict the tax regime they will operate under, they cannot predict the cost or availability of financing, so they can’t make sound decisions about how to expand or hire. I’ve been seeing investment banks update their models for U.S. economic growth, but I’m not even sure how you model this — the issue isn’t just that tariffs are higher or rates are higher but that they are unknown, and what the president will do about them is also unknown.
So I’m a little at a loss to assess what the likely track is for the U.S. economy — is this going to put us into a recession? And is there even a course the president could take now to reverse that, since he’s shown himself to be so likely to do further erratic things in the future?
Brainard: If there is one — and I sincerely hope there is not — a recession will be entirely self-inflicted, given that the United States started the year from a position of enviable strength with inflation that has been coming down, strong growth and very good employment. We have seen in cases like Brexit that a large enough amount of uncertainty can actually contribute to a recession.
Sen: The easiest dynamic to think about at the moment is this is a shock to the goods economy and supply chains, somewhat similar to what we saw during and after the Covid-19 pandemic.
Barro: The next Democratic president — and maybe even the next Republican president — will likely be focused on trying to rebuild the United States’ position at the center of the global economic system after Trump’s efforts to blow it up. Is that something that will be possible? Besides saying “we’re sorry,” what can America do to send a signal that it is a reliable partner again on trade and finance?
Brainard: Well, before then, I hope we will see some of the critical checks and balances that are foundational to our strong institutions and vibrant economy help to restore smarter policy. The Trump tariffs seem like a breathtaking overreach on the executive branch’s delegated authority on the issue, and it is important for Congress to restore the guardrails. If the Republican Congress won’t do that, perhaps the courts will.
Barro: Different Democrats have been taking different lines of criticism about the president’s aggressive tariff agenda. Some — like Governors Jared Polis, Gavin Newsom and JB Pritzker — have made fairly straightforward arguments that tariffs are taxes on the American consumer and we should have less of them. Others — including Representative Pramila Jayapal and Senator Chris Murphy — have argued for a tariff approach that is designed with much more strategy and clarity to promote U.S. industries.
Which of these ideas is right — do we need a better-designed regime of protective tariffs, or are tariffs simply a bad idea?
Brainard: It is important to take a strong stand to make sure trade is fair. And strategically targeted tariffs are an important part of a strategy that makes sure America can compete fairly in key industries. But it is also important to provide investment incentives. I supported 100 percent tariffs on Chinese cars to guard against a flood of unfairly underpriced imports coupled with special tax incentives for U.S. car manufacturers.
But it doesn’t make any sense to impose high tariffs on countries and products across the board — it just puts an enormous price hike on American working families that can afford it the least, disadvantages U.S. businesses that rely on some imported inputs and risks a recession for no benefit to the United States.
Sen: We’ve seen consistently over the past few years that Americans are unhappy about high prices. And tariffs are going to raise prices and lead to less product availability for U.S. consumers. As much as Americans say that they want more production happening domestically and more manufacturing jobs, the evidence we have so far suggests that they’re not willing to accept higher inflation if that’s the cost of the policy.
Barro: My personal favorite recession indicator is when normies who don’t usually follow finance ask me questions about the bond market. Are there any lesser-used indicators that you like to watch in challenging times like these?
Brainard: My 17-year-old daughter is sending me “Ferris Bueller” Smoot-Hawley clips. It is really striking to see the increase in awareness in surveys of the connection between tariffs and high prices, and the surge in consumer inflation expectations is notable.
Sen: Markets have been worried about there being a “sudden stop” in the economy, which is why measures of stock market volatility like the VIX Index have exploded. Those fears have dissipated somewhat. What’s challenging when thinking about recession risk is some of the “freight guys” on social media are losing their minds about container ships not coming to the United States from China. That seems to be where the recession risk is, but it’s hard to track with an easy-to-follow data point.
Barro: What was the most recent U.S. economic policy that was worse than Trump’s tariff policy?
Sen: My memory only goes back 20 years, and while this isn’t on the same scale, the debt ceiling standoff and sequester in 2011 between President Barack Obama and Republicans in Congress that cut spending across the board at a time when unemployment was high, inflation was low and the economy was still struggling to recover from the 2008 Great Recession was particularly moronic.
Brainard: I was at the Treasury Department in 2011, and I agree that the debt ceiling standoff was a disaster. The spending cuts were bad for working Americans who were facing a more challenging job market, and it did not ultimately lead to any improvement in U.S. debt.
Barro: I was expecting someone to say the Smoot-Hawley tariffs.
Brainard: Those were not recent!
Barro: Larry Fink, the chief executive of BlackRock, said recently that “most C.E.O.s I talk to would say we are probably in a recession right now.” What would you say is the percentage likelihood of a recession in 2025?
Brainard: Let’s say the likelihood of the United States going into recession has increased materially. The economy started out the year very strong, so it would be malpractice to see a self-inflicted recession.
Sen: We’re already in what I’d call a business planning recession — every C.E.O. now needs to budget and plan for a recession, which means less hiring and less investment than they budgeted for a month ago. I’d put it at 50-50 odds, which is about where the consensus is right now.
Josh Barro, a contributing Opinion writer, is the author of the newsletter Very Serious and the host of the podcast “Serious Trouble.” Lael Brainard, a fellow at the Georgetown Psaros Center and a senior fellow at Harvard Kennedy School, was the director of the National Economic Council from 2023 to 2025 and a vice chair of the Federal Reserve. Conor Sen is a columnist at Bloomberg Opinion and the founder of Peachtree Creek Investments.
Source photographs by Anadolu, Paul Taylor, JIM WATSON via Getty Images.
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