From the Desk

As tariff headlines cool, at least for now, the next big policy task is hammering out the federal budget. President Donald Trump promised a lot of perks and tax breaks on the campaign trail. Now, Congress is drafting a plan to deliver on those while trying to find offsets to keep debt under control. The hope was that potential tariff revenue and government cuts could fund the extra spending. But the initial optimistic windfall from both now looks modest. Therefore, it seems likely that the eventual budget will result in more government borrowing. 

Meanwhile, the Congressional Budget Office forecasts a spike in U.S. federal debt over the next few decades. If politicians do not rein in spending or increase taxes, then where will fiscal discipline come from? 

At that point the likely savior will be the bond market. When the bond market decides countries might become fiscally unbalanced, it demands higher rates. This typically pressures policymakers to rethink their plans. That already happened over the last few years in the U.K. and France. Bond markets impelled both countries to overhaul initial budget proposals and incorporate more spending cuts. 

Will the U.S. face a similar episode? It’s hard to tell the timing of when markets lose patience and push back. But the U.S. 30-year Treasury rate has already been moving closer to 5%. If the market gets wedded to that high level, it would be something we haven’t seen in a few decades. 

Sources: Bloomberg, Financial Times, 2025.

The April U.S. Consumer Price Index (CPI) report came in below expectations this week. The headline index was +0.2% month over month and +2.3% year over year. Many observers were looking for early signs of tariff-related price hikes, but it may be a bit early for this right now as core goods were up a modest 0.1% month over month. Looking under the surface, there may have been some signs of such increases in areas such as electronics and appliances, but there was no material jump in new cars or apparel. 

There are a range of possibilities for inflation data in the coming months. On the one hand, we should see tariff-related price increases become more evident. Conversely, companies have built inventories and consumer confidence has taken a hit in recent months, which may lessen the magnitude of price increases in the near term.

Sources: Bureau of Labor Statistics (BLS), Bloomberg, 2025.