Uncertainty Surrounds First Ukraine Peace Talks in Years as Moscow Delays Delegation Announcement

Republican lawmakers in Congress have been debating and finalizing pieces of legislation related to tax cuts and spending reductions in U.S. President Donald Trump’s "big, beautiful" bill, as they race to pass the measure before May 26.

The bill would then go to the Senate, with Trump aiming to sign it into law by July 4.

Crucially, Republicans, who control both chambers of Congress, will be able to utilize a rule known as "reconciliation", which allows for a 60-vote filibuster threshold to be bypassed. This would mean that the GOP could pass Trump’s bill without support from Democrats.

But media reports have suggested that there have been major disagreements within the Republican party, with some lawmakers uneasy about deep reductions to government healthcare programs like Medicare and others complaining that not enough is being done to rightsize the more than $36 trillion U.S. debt pile.

According to the Wall Street Journal, Republicans have also been at odds over proposals to phase out tax credits for renewable energy producers, which was a major pillar of former President Joe Biden’s Inflation Reduction Act in 2022. Some Republicans want these credits to be immediately axed, while another group of GOP representatives are frustrated that these are being discontinued, the WSJ said.

Meanwhile, Republicans from high-tax states like California and New York have registered their concerns about revised caps to state and local tax -- or SALT -- deductions.

Taken together, reports say the major pillars of Trump’s budget legislation -- which would see the extension of tax cuts instituted during the president’s first term -- may add around $36.2 trillion to the country’s debt over the next decade. The tax cuts themselves would cost $3.72 trillion, Reuters reported.

"The bill [...] makes good on many of Trump’s campaign promises (like no tax on tips or overtime, a deduction for seniors, and deductible interest on auto loans), deals with SALT, provides large capex incentives, curtails the renewable subsidies in the Inflation Reduction Act, and proposes an array of tax increases to offset the cost of new cuts," analysts at Piper Sandler said in a note to clients.

The brokerage estimated that the legislation would expand the budget deficit "meaningfully" in the short-term -- by 0.2% of gross domestic product in the 2025 fiscal year and about 0.9% of GDP in the following year.

Still, the bill could change a number of times prior to its final passage, the Piper Sandler analysts noted, adding that House committees will have the chance to "mark up" -- or debate, amend, or rewrite legislation -- over the coming days. The Senate will also have its own draft as well that will need to be reconciled with the House’s version.

"We still believe this reconciliation package is on track to pass before August recess," the analysts predicted.

Source: Investing

A chart showing Nvidia's share price

Source: Reuters

The agreement between the US and China to roll back their respective tariffs for 90 days has led to renewed optimism that the worst of America’s trade wars is over. I’m not seeing the “breakthrough”: There’s still plenty of scope for economic damage that the Federal Reserve will struggle to contain.

First, the rollback might not last and doesn’t change the broad contours of the story. Tariffs will still be high, fueling inflation and stunting growth. The Yale Budget Lab estimates that the average effective tariff rate will be 17.8%, up from about 2.5% when President Trump started his second term. That’s enough to increase the price level and the unemployment rate by about 1.7 and 0.35 percentage points, respectively.

Second, the 90-day pause merely extends the corrosive uncertainty surrounding the US administration’s policies. This will lead businesses to delay purchase, investment and hiring decisions.

Third, the Fed will still face the difficult choice between fighting inflation and supporting economic growth. In the near term, it’ll have to be patient, holding interest rates steady and watching inflation expectations — even as this raises the president’s ire. As a result, it will probably be slow in responding to weakening in the economy.

The Fed has little choice. When it doesn’t know which way the risks skew, it must wait for more information. Right now any major move would have only a 50/50 chance of a positive outcome.

The central bank’s predicament is particularly difficult given that inflation has overshot its 2% target since 2021. This makes any attempt to prioritize growth fraught, because it increases the probability that inflation expectations will become unanchored, triggering an upward price spiral that would be hard to contain. That’s an asymmetric risk the Fed can’t afford to take. When inflation expectations rose in the 1970s, it took punishingly high interest rates and a deep economic downturn to get them back under control.

Being patient, though, also entails risks. As the economist Claudia Sahm has noted, weakness in the labor market can also be self-reinforcing, as layoffs hit spending and engender more layoffs. Historically, the unemployment rate has tended to rise sharply after crossing the threshold of a 0.5 percentage point increase, leading to recession. Last year proved to be an exception, because the rise in unemployment resulted from labor force growth outpacing strong hiring. This time will be different: Hiring will slow, while deportations and a border crackdown have depressed labor force growth.

What, then, will the Fed do? It probably won’t get much clarity on inflation, growth and trade policy until September. If at that point it needs to reduce rates, it’ll have to move aggressively to arrest the deterioration in the labor market — especially given that the tariff-induced supply shock will undermine the effectiveness of monetary policy. If the US enters a recession, I’d expect rate cuts of 200 to 300 basis points.

The Fed shouldn’t be faulted here. In contrast to the pandemic, when it was too slow in responding to inflationary pressures (thanks in part to a flawed monetary policy framework), this time around it’s grappling with the fallout of trade policies that are beyond its control. One can only sympathize and hope that clarity about the proper course emerges soon enough that the Fed can keep the economy afloat.

Source: Bloomberg Europe

The 90-Day Trade Truce and Its Business Implications

Business Adjustments in Response to Tariffs

China’s Long-Term Strategy: A Push for Self-Sufficiency

The Larger Picture: U.S.-China Relations and Global Trade Shifts

Source: CNBC