Trump's Litmus Test for New Fed Chair: Lower Rates

President Donald Trump has indicated a new willingness to allow China and India to invest in Venezuela's troubled oil industry. However, this apparent openness is paired with a strict new licensing framework from the U.S. Treasury Department, ensuring that Washington will maintain tight control over any renewed oil trade.

Speaking to reporters on January 31, Trump said China is "welcome to come in and we'll make a great deal on oil." He also confirmed that the U.S. is coordinating with India on a plan for it to purchase Venezuelan crude as an alternative to Iranian oil, stating the basic "concept" is already in place.

These remarks coincide with new U.S. regulations that define exactly who can participate in Venezuela's oil sector, how payments are processed, and where legal disputes will be settled. Together, the comments and rules signal a cautious reopening of Venezuelan oil, channeled through a system the United States can closely monitor and enforce.

A Venezuelan oil facility highlights the nation's vast but troubled energy sector, now at the center of a US-led effort to control foreign investment.

The Fine Print: Unpacking US General License 46

The U.S. Treasury's Office of Foreign Assets Control (OFAC) recently issued General License 46, which authorizes specific activities related to Venezuelan oil. The license permits established U.S. entities to engage in lifting, shipping, buying, selling, storing, and refining oil originating from Venezuela.

But this authorization comes with significant constraints designed to assert U.S. jurisdiction:

• Legal Framework: All contracts under the license must be governed by U.S. law.

• Dispute Resolution: Any legal disputes must be adjudicated in U.S. courts.

• Payment Channels: Payments to sanctioned parties are prohibited. Instead, funds must be directed into U.S.-designated "Foreign Government Deposit Funds," where their use is restricted.

• Country Exclusions: The license explicitly forbids transactions involving Russia, Iran, North Korea, or Cuba.

The rules also place specific limits on Chinese entities. The license bars transactions involving U.S. or Venezuelan-based companies that are owned, controlled by, or in a joint venture with individuals or firms based in the People's Republic of China.

To support this framework, a White House executive order on January 9 established the Foreign Government Deposit Funds. This system ensures that Venezuela-related oil revenues moving through designated accounts are held in U.S. custody. The structure is intended to prevent funds from reaching blocked actors and gives Washington significant leverage over how Venezuela's oil money is handled.

India Eyes a Return as US Pushes Out Russian Crude

India was previously a major buyer of Venezuelan oil, importing an average of 300,000 barrels per day in 2019 before U.S. sanctions tightened in 2020. Trump's comments suggest a strategic realignment is underway.

On January 2, Trump announced a new trade agreement with India that includes immediate tariff reductions. He also stated that India has agreed to halt its purchases of Russian oil, a move aimed at pressuring Moscow financially. Since Western sanctions were imposed, India and China have been top buyers of discounted Russian crude, which helps fund Russia's war in Ukraine.

Trump noted that India is interested in buying "much more" Venezuelan oil. This interest aligns with recent changes in Venezuela's hydrocarbons law, which aims to attract foreign investment by loosening state control. For India, Venezuelan crude offers an alternative supply that is compliant with U.S. foreign policy, even if it requires accepting American oversight.

China's Billions in Loans Complicate Venezuelan Oil Play

China's involvement in Venezuela is far more complex and carries higher financial stakes. Over the past two decades, Beijing became a primary financial backer for Caracas, extending an estimated $60 billion in "loans-for-oil" agreements since 2007, according to a Columbia University analysis.

A large portion of Venezuela's oil exports has gone directly toward repaying this massive debt. By 2023, data from the U.S. Energy Information Administration (EIA) showed that about 68% of Venezuelan oil exports were directed to China.

If the U.S. successfully channels Venezuela's oil trade through its new framework, China could face significant financial losses. The Columbia analysis estimates that Beijing stands to lose between $10 billion and $12 billion on its outstanding loans. When asked on January 31 if China would ever recover its loans to Venezuela, Trump simply replied, "I don't know."

Venezuela's Production Puzzle: Can the Oil Giant Recover?

Even with a clearer legal path forward, a rapid recovery of Venezuela's oil output is unlikely. The nation sits on an estimated 303 billion barrels of proven oil reserves—among the world's largest. However, much of this is heavy or extra-heavy crude that requires costly specialized processing and blending.

Decades of mismanagement, sanctions, infrastructure decay, and a brain drain of skilled workers have devastated the industry. After producing around 3.5 million barrels per day in the late 1990s, output had fallen to an estimated 1.1 million barrels per day by late 2025.

Recent U.S. import data from the EIA shows flows from Venezuela remain minimal, ranging from 72,000 to 120,000 barrels per day in January 2026. While an increase from virtually zero, these volumes are negligible in the global market.

Wall Street analysts are forecasting modest growth. In a January 8 report, JPMorgan Chase estimated that production could climb to between 1.3 million and 1.4 million barrels per day within two years under a new administration. Goldman Sachs analysts projected in a January 5 interview that if output reaches 2 million barrels per day, global oil prices could fall by about $4 per barrel, benefiting U.S. consumers but creating deflationary pressure for other oil-producing nations.

President Donald Trump expressed strong confidence on Wednesday that the Federal Reserve will lower its benchmark interest rates, signaling his clear expectations for the central bank's monetary policy.

In an interview with NBC News, Trump stated there was "not much" doubt in his mind that the Fed would move to cut rates. His comments underscore his long-standing preference for a more accommodative monetary stance to fuel economic activity.

Fed Chair Nominee Must Favor Lower Rates

The president also tied his preference for monetary easing directly to his selection for the Federal Reserve's leadership. Discussing his nominee, Kevin Warsh, Trump suggested that an alignment on interest rate policy was a core requirement for the job.

When asked if Warsh understood the president's desire for lower rates, Trump replied, "I think he does, but I think he wants to anyway."

Trump made it explicit that any candidate advocating for rate hikes would be disqualified from consideration. "I mean, if he came in and said, 'I want to raise them' ... he would not have gotten the job. No," the president affirmed.

DOJ Probe Halts Nomination of New Fed Chair

A criminal investigation launched by the Trump administration into Federal Reserve Chair Jerome Powell has stalled the confirmation of his successor, creating a high-stakes standoff in Washington. The probe now threatens to derail President Donald Trump's pick to lead the central bank, former Fed Governor Kevin Warsh.

The conflict escalated after Powell disclosed that the Department of Justice had served the Fed with subpoenas. The investigation centers on statements Powell made to the Senate Banking Committee in June regarding renovations at the Fed's building, which the White House had publicly criticized for overspending.

Powell has framed the probe as an intimidation tactic in the administration's broader push for the Fed to cut interest rates. The move drew sharp criticism from Democrats and, more significantly, from Republican Senator Thom Tillis of the Senate Banking Committee. Tillis labeled the investigation as political interference and pledged to block any Fed nominee as long as it continues.

This opposition is critical. Fed nominations must clear the Senate Banking Committee with a majority vote. With Tillis refusing to support a nominee and Democrats united against the proceedings, any nomination like Warsh's would face a deadlock in the committee, preventing it from reaching the full Senate for a final vote.

Scott Enters Fray: Incompetence Isn't a Crime

Breaking weeks of tension, Republican Senator Tim Scott, who chairs the Senate Banking Committee, has directly pushed back against the investigation. On Wednesday, Scott stated he does not believe Jerome Powell broke the law during his congressional testimony last summer.

In an interview with Fox Business Network, Scott clarified that it was he who had questioned Powell about the building renovations. "I do not believe that he committed a crime during the hearing," Scott said.

He offered a blunt assessment of Powell's performance but distinguished it from criminal wrongdoing. Scott said he would tell any prosecutor that he found Powell "to be inept at doing his job, but ineptness or being incompetent is not a criminal act."

Scott expressed optimism about resolving the impasse, stating he has had "productive conversations" with Tillis and believes a solution can be found to move Warsh's nomination forward with unified Republican support on the committee.

Tillis Digs In, Calling Investigation 'Vindictive'

Despite Scott's confidence, Senator Tillis has shown no signs of backing down. Speaking on CNBC, he described the DOJ probe as a "vindictive" act. He argued it appeared to be "an attempt to try and force somebody out of the Fed Board because you disagree with their policies."

Tillis's firm stance has effectively frozen any progress on confirming Warsh, who is generally popular among Republicans and shares Trump's view that interest rates should be lower.

Powell's Next Move Could Complicate Trump's Plans

The ongoing probe has introduced another layer of complexity: the possibility that Powell may choose to remain at the Fed even after his term as chair ends in May. While most Fed chairs depart the central bank entirely, Powell's term as a Fed governor does not expire until 2028, and he has not confirmed his plans.

Tillis highlighted this "perverse consequence," suggesting Powell might stay on principle. "I know how I would react to this: I'd be there for the remaining two years because I don't want to reward bad behavior," he said.

If Powell stays, it would deny Trump an open seat on the Fed Board to fill with another advocate for rate cuts. It would also create a unique dynamic where an influential former chair remains at the policy-setting table, potentially complicating the leadership of his successor.

GOP Divided on Strategy as Confirmation Battle Looms

The situation has revealed a split among Senate Banking Committee Republicans on how to handle the stalemate. Senator Kevin Cramer described Tillis's opposition to Warsh's nomination as a "not a winning strategy" and expressed his hope that Powell would "exit gracefully."

However, even Cramer voiced his belief that the Fed chair does not belong in court. "I don't think that he belongs in a federal courtroom or a federal penitentiary," he stated, signaling a broader Republican unease with the criminal probe itself, even if they disagree on the best political response.

Japan’s three largest commercial banks are on track for a third consecutive year of record-breaking full-year profits, driven by a surge in lending income from higher domestic interest rates.

Mitsubishi UFJ Financial Group (MUFG), Sumitomo Mitsui Financial Group (SMFG), and Mizuho Financial Group collectively generated a record 4.22 trillion yen ($26.9 billion) in net profit for the April-December 2025 period, a 13% increase from the previous year. All three have maintained their earnings forecasts for the full fiscal year.

The banking giants are projected to achieve a total net profit of 4.73 trillion yen for the year ending in March. This would represent 9% of the total net profit from all companies listed on the Tokyo Stock Exchange's Prime market, an increase of 1.6 percentage points from the prior year.

MUFG reported a 4% year-on-year rise in its consolidated net profit to 1.81 trillion yen for the nine-month period, marking its third straight record for that timeframe. The bank cited higher interest rates boosting deposit and loan revenue, growing fee income, and strong performance from its U.S. partner Morgan Stanley.

SMFG and Mizuho also delivered record profits. When including Sumitomo Mitsui Trust Group and Resona Holdings, Japan's five largest banks saw their combined net profits climb 14% to 4.71 trillion yen, setting a new high for the third year in a row.

Figure 1: This chart illustrates the combined net profits for Japan's five largest banks from April to December for the years 2011 through 2025, highlighting a dramatic increase in earnings after 2020.

Rising Interest Rates Fuel Profit Surge

The primary catalyst for this performance has been the Bank of Japan's interest rate hikes. The BOJ's most recent move in December 2025 raised the policy rate by 25 basis points to 0.75%. This series of rate increases, which began with the end of the negative interest rate policy in March 2024, is expected to boost the megabanks' combined net interest income by an estimated 700 billion yen for the full year ending March 2026.

Higher market rates have successfully widened the banks' interest spreads—the difference between what they charge for loans and what they pay on deposits. For the April-December 2025 period, the average interest spread at the megabanks reached 1.04 percentage points, the highest level in 11 years. As a result, their combined net interest income from lending and other sources grew 17% to a new high of 3.81 trillion yen.

Strong Corporate Demand Boosts Lending and Fees

Robust demand for capital from the corporate sector provided another significant tailwind. As of the end of December 2025, the total loan balance across the three megabanks had increased by 3% from the previous year. This growth was driven by strong demand for financing related to mergers and acquisitions as well as real estate projects.

This activity also translated into higher fee income. Combined profits from fees and commissions, including loan origination and M&A advisory services, rose 9% year-on-year to a record 1.6 trillion yen.

Managing the Risks of a High-Rate Environment

While rising interest rates are beneficial for lending profits, they create headwinds for bond portfolios by decreasing their market value. By the end of December, the megabanks held a combined 748.6 billion yen in unrealized losses on their domestic bond holdings, a 33% increase over just three months.

However, the impact on earnings is expected to be limited. The banks proactively managed this risk by shortening the maturities of their securities. Furthermore, their unrealized gains on stock holdings provided a substantial cushion, rising 11% in three months to approximately 8 trillion yen. Overall, their combined securities portfolios held unrealized gains of around 8.5 trillion yen.

Future Challenges: Borrower Health and Deposit Growth

Looking ahead, the banks face several challenges. Although the non-performing loan ratio remains low across all three institutions, a key focus will be the impact of a higher interest burden on borrowers.

Attracting enough deposits to fund lending growth is another critical task. The combined domestic deposit balance for the three banks grew by only 0.6% year-on-year as of December 2025. Corporate clients are increasingly moving funds into financial products with higher yields. In response, banks are expected to enhance their efforts to attract both retail and corporate deposits by improving digital services and raising interest rates on fixed-term accounts.

Despite these potential hurdles, all three megabanks have maintained their full-year earnings forecasts for the year ending March 2026. Having already achieved roughly 90% of their profit targets by December, they appear confident but have factored in allowances for potential market uncertainty and geopolitical risks.

Donald Trump's return to the presidency came with a familiar promise: to finally curb China's economic ascent. Yet his first year in office has produced the opposite outcome, handing Chinese President Xi Jinping a series of strategic advantages. The global landscape is now more receptive to Chinese exports, more inclined to hedge against Washington's volatility, and increasingly skeptical of America's reliability as an ally.

Allies Hedging Bets Against US Unpredictability

President Trump's unpredictable and often combative diplomatic style has given President Xi more room to maneuver on the world stage. Instead of falling in line with Washington, key US allies and so-called middle powers are hedging their bets.

Leaders from Canada to Europe, though frustrated by a flood of Chinese goods, have stopped short of erecting significant new trade barriers. According to Bloomberg Executive Editor Dan Ten Kate, they are actively courting Beijing as a form of insurance against Trump's erratic tariff threats and aggressive military posture. In a twist of irony, Ten Kate notes that economic tools originally designed to counter Chinese coercion are now more likely to be directed at the United States itself.

China's Export-Driven Economy Remains Unchanged

Despite Trump's intentions, Beijing has not been forced to alter its state-driven, export-heavy economic model. In fact, China's reliance on foreign demand has only grown stronger. The country posted a record trade surplus last year, with exports rising to their highest share of the economy since the global financial crisis.

While nations from Ottawa to Paris express frustration over the influx of Chinese products—from electric vehicles to industrial equipment—this has not translated into meaningful action. Washington's inconsistent foreign policy has left other countries hesitant to join a united front against China, allowing Beijing to continue its economic strategy without major opposition.

Beijing's Strategic Limits and Endgame

However, China's current strategic advantage has clear limits. Richard McGregor, a Senior Fellow at the Lowy Institute, points out that Beijing is in no position to replace the United States as the world's primary market for finished goods.

President Xi's ambitions are constrained by significant internal challenges, including:

• Ongoing territorial disputes

• A rapidly aging population

• An economic structure geared toward self-reliance rather than consumption

For now, Beijing's primary objective is simple: achieve stability in its relationship with Trump. With high-level summits planned and Washington's restrictions on trade and technology under review, China's immediate goal is to keep the US president engaged. This strategy is designed to buy crucial time to manage domestic issues while securing more breathing room on the international stage.

Mexico's national oil company, Pemex, has affirmed its commitment to continue supplying oil to Cuba, defying growing pressure from the administration of U.S. President Donald Trump to sever ties with the island nation.

Pemex CEO Victor Rodriguez Padilla confirmed that the company has a contract to deliver refined fuel to Cuba running from 2023 and intends to honor it. According to Rodriguez, Pemex will maintain oil shipments as long as there is available crude.

Mexico's Official Stance on Shipments

The announcement follows recent statements from Mexican President Claudia Sheinbaum, who last week acknowledged a temporary suspension of oil exports to Cuba. However, she attributed the pause to general supply fluctuations rather than political pressure from Washington.

"Pemex makes decisions in the contractual relationship it has with Cuba," Sheinbaum stated, emphasizing Mexico's autonomy. "Suspending is a sovereign decision and is taken when necessary."

Escalating Pressure from Washington

The situation has intensified following an executive order signed by President Trump threatening punitive tariffs against any nation, including Mexico, that supplies oil to Cuba.

On Monday, Trump directly addressed the issue, telling reporters, "Mexico is going to cease sending them oil," and referred to Cuba as a "failed nation."

Mexico's Role as a Key Energy Supplier

Following the collapse of Nicolas Maduro's government in Venezuela, Mexico has emerged as a crucial energy lifeline for Cuba, which is grappling with a severe energy crisis.

Throughout 2024 and early 2025, Pemex exported between 17,000 and 20,000 barrels per day (bpd) of crude and refined products to the country. While the Mexican government has often framed these shipments as humanitarian aid, their value exceeded $1 billion by late 2025. A significant portion of these deliveries was managed through the subsidiary Gasolinas Bienestar.

Financial Scrutiny and Debt Concerns

The terms of these oil shipments have drawn scrutiny, particularly due to their subsidized nature and their effect on Pemex's own financial stability. The company has been supplying Cuba on what appear to be credit or service-exchange terms, even as it faces high debt levels with its own suppliers.

While officially logged as accounts receivable, these transactions are widely seen as aid, carrying a substantial risk of becoming unpayable and adding to Pemex's financial strain.