The Outsider Perspective Issue 439 | The Beltway Outsiders

If you’d like to read this issue on my website, click here! If you’d like to sign-up, and receive this in your inbox each week, click here! Read past issues here.

Good Friday Morning! Except to the federal government and tax day. We’re finally beyond tax filing season in the United States. Roy McIlroy, who just won The Masters in Augusta, Georgia, will have to pay a hefty tax fee after winning the event.

According to estimates, he’ll have to fork over $2.4 million of his overall $4.2 million prize money after winning the event. The newly enshrined Grand Slam victor is a Florida resident, but he has to pay federal taxes and Georgia taxes since he won in that state.

Thanks, Uncle Sam. No good deed goes untaxed.

This week, I’m going to get back into the inflation story because there were fireworks between Trump and Jerome Powell – links to follow.

Quick Hits:

Kilmar Abrego Garcia’s story is one of the weirder political stories. Democratic Senator Chris Van Hollen of MD visited him in El Salvador, demanding release. Other Democrats are trying to make the pilgrimage, too. The same day that happened, the DailyMail nuked everyone by dropping domestic violence reports that Garcia’s current wife filed against him, where he beat her. Combined with other reports of Garcia, it’s a bizarre hill Democrats are choosing to die on. I’m fully aware of the due process arguments that are involved here – which is fine as an argument – but Democrats are setting this guy up as a “Maryland father,” and a saint. It’s bizarre.
The American Almanac is growing! I want to express my continuing thanks to those of you who subscribe, share, and help us grow. You can subscribe here for free.

Where you can find me this week

Please subscribe, rate, and review The Horse Race on YouTube — the reviews help listeners, and readers like you find me. Make sure to sign up for the Conservative Institute’s daily newsletter and The American Almanac.

China Threatens The Trade System ‘I, Pencil’ Promises – Conservative Institute

Trump’s Economic Forecast Is Sunny With A Chance Of Severe Storms – Conservative Institute

Vile Leftist Antisemites Want To Kill Jewish Democrats Now – Conservative Institute

Inflation and a strong economy make life miserable for policymakers

In the aftermath of the election, I said the top issue for Trump would be inflation. It makes everything more complicated. What I’ve noted in the intervening months is that Trump wants interest rates lowered, and he and Scott Bessent are using their tariff policies to try to achieve that while also isolating China.

In the previous weeks, the trade war part of this has ramped up. Tariff rates against China are basically at levels that end all forms of trade. As an example of how this is hitting Chinese retailers, TEMU has effectively shut down all advertising in the U.S. It went from a top 10 app to barely registering in the top 100. The TEMU/SHEIN domination of social media is drying up.

But Trump’s desire for lower interest rates is running headlong into a Federal Reserve that is terrified of lowering rates. When the Fed lowered interest rates in 2024, I noted that they didn’t have any evidence suggesting that they’d solved inflation. That ended up being true because now the Fed believes that if they lower interest rates, inflation will take back off.

Escalating things further: Trump wants Powell out of the Fed.

Fed-whisperer Nick Timiraos writes in The Wall Street Journal:

The problem is twofold. It isn’t clear the president has the legal authority to dismiss Powell before his term ends next year. And Trump’s trade war has made rate cuts more difficult for now because the Fed fears acting to shore up the economy could worsen inflation.

That tension has left the two men on a collision course without any easy escape—unless Trump backs down on tariffs or until the economy shows signs it is crumpling under the weight of the import duties.

Tariffs cause price increases, which are inflationary. However, that’s only part of the question. In the Federal Reserve’s own minutes, they describe not knowing if the non-tariff drivers of inflation are gone. In other words, even without tariffs, it’s not clear that the Fed would cut now.

Timiraos continues:

Tensions boiled over this week after Powell on Wednesday dryly observed how the central bank would face difficult trade-offs managing the fallout from a trade war.

Trump blasted Powell in a social-media post on Thursday, saying the end of his term “cannot come fast enough.” Later, he told reporters, “If I want him out, he’ll be out of there real fast, believe me.”

Now, ultimately, I do believe that Trump has the power to remove Powell. I tend to believe that the direction the Supreme Court is taking would allow the Executive Branch to remove any official at that level.

Regardless, the big story here is the policy clash. Trump wants lower interest rates, to refinance the debt, and to have a tool to boost markets and the economy later on.

In truth, I believe part of Trump’s outbursts are a means to give him an enemy to blame in the event we enter a recession. But there’s no evidence we have cracks in the labor market. The most recent jobless claims report showed no uptick in people seeking unemployment benefits.

But while that’s good economic news, it’s bad news if you want lower interest rates. When the Federal Reserve is lowering interest rates, that tends to suggest two things: 1) They need a lower neutral rate, or 2) the economy is headed south.

We’re not arguing about the neutral rate anymore. The discussion is whether economic activity is slowing enough for the Fed to lower interest rates. If you look at the Atlanta Federal Reserve’s estimate for the first quarter, negative growth is expected.

It’s somewhat ironic, but Trump’s calls for lower interest rates aren’t much different from Democrats, who believe tariffs will lead to a recession. Both are banking on lower economic growth, but aside from future projections like the Atlanta Fed or economic models, there’s no real data showing the economy is weakening.

That’s the crux of the matter for the Fed. Powell probably would like to get lower rates, but he lacks a defensible path to do that. While Trump wants lower rates eventually, his staff was adamant ahead of the election that they’d likely need higher rates for a while to burn out the rest of inflation’s bite.

Timiraos notes in his piece:

Setting interest rates to cushion the economy from a so-called supply shock that limits the ability of the economy to produce goods and services is a particularly challenging situation for central banks. A trade war could initially send up prices while also weakening demand, hitting the labor market.

Until it is clear whether inflation or unemployment is the bigger problem, anything the Fed does with interest rates to restrain inflationary pressures could worsen unemployment, and vice versa.

In short, the Fed doesn’t know what to do because of Trump’s policy chaos. But they didn’t have a super clear path coming into 2025, either.

When might some of this clear up? We could get some idea at the end of the month. The Q1 GDP report drops on April 30, an advance estimate. It will be revised again on May 29 and June 26 and finalized on June 30. That first look, which will be inaccurate on April 30, will be watched by everyone like a hawk.

If the United States has negative growth and the Atlanta Fed is right, the White House’s drumbeat to lower interest rates will ratchet up exponentially. Trump will likely start blaming the Fed for a downturn. Democrats, if they’re smart, will blame tariffs.

On the flip side, Trump has to start pushing for tax cuts and land trade deals ASAP. He has some time to keep this up, but he’ll need to string together wins to keep markets floating along.

The WSJ Editorial Board noted similar dynamics:

Mr. Trump is right that the Powell Fed has been wrong before. Its mistake in accommodating a gusher of federal pandemic spending with easier money contributed to the worst inflation since the 1970s. The Fed has been trying to claw back from that mistake, with some success. But the Fed hasn’t reached its target inflation rate of 2%, so Mr. Powell is right to be wary of trying to offset the impact of tariffs by easing money too much or too soon.

That was the mistake the Fed made in the 1970s after Richard Nixon suspended dollar convertibility to gold and blew up the Bretton Woods monetary system. Mr. Trump’s tariff barrage is the biggest assault on the world trading system since the end of Bretton Woods.

If the President wants faster growth and less market turmoil, he can help by ending his tariff campaign. Then get Congress to move on a tax- and spending-cut bill, and press ahead with deregulation. The main lesson from Trump vs. Powell is that the central bank can’t make up for the economic policy errors of politicians.

Here’s the thing, though: that’s unlikely to happen. The White House is converting the tariff war into a national security tool in the fight against China. What we’re going to get are tariffs, tax cuts, deregulation, and trade deals with non-China countries. Meanwhile, the trade war will continue. We’ll probably eventually get a trade deal with China, but that’s likely later in the year and not in the near term.

How that all combines is a big unknown moving forward. But inflation is still there, lurking in the shadows, complicating every decision. Until it is officially dead, all government decisions will be complicated.

Links of the week

Trump tariffing China at the worst possible time for Xi Jinping – Fox News

Justices will hear arguments on Trump’s effort to end birthright citizenship – SCOTUSBlog

FSU gunman espoused virulent right-wing beliefs – DailyMail

CNN and Taylor Lorenz Exposed Their Motivation: Lorenz said accused murderer Luigi Mangione “seems like he’s this morally good man.” – American Spectator

Universities Are Hiding Behind “Due Process”: Princeton president Christopher Eisgruber seeks to distract from his university’s tolerance of anti-Semitism. – City Journal

The pathetic, slow-motion downfall of Barack Obama – The Hill

Judge holds Google ads violate antitrust laws – CNBC

Brutal Juxtaposition: Mother of Woman Slain by Illegal Immigrant Slams Van Hollen Trip to El Salvador – RealClearPolitics

USTR Targets China’s Maritime Dominance With New Fee Structure and U.S.-Build Incentives – gCaptain

X/Twitter Thread(s) of the week

Zillow forecasting home prices will collapse in most U.S. metros.