Headwinds For Big Beautiful Bill

Courts, Powell Add to Trump's Problems

This was a week when yesterday’s data on the Federal Reserve’s favorite price measure, the PCE deflator, would have been expected to be the big news on the economic front. Instead, the focus was on the sustainability of the tax cuts incorporated in President Donald Trump’s Big Beautiful Bill, resignation from government of a major Trump supporter, and a court striking down tariffs that had been expected to narrow the fiscal gap. The President attempted to get some relief in a meeting with Federal Reserve Chairman Jerome Powell but was frustrated in those efforts as well.

Elon Musk, a major Trump campaign supporter and champion of the Department of Government Efficiency (DOGE), announced his resignation in order to focus on his companies. DOGE had been intended to slash wasteful spending in different branches of government and contribute to reducing the fiscal deficit. Musk is expected to say in an interview to be aired tomorrow on “CBS Sunday Morning” that he is disappointed in the ballooning deficit implied by the Trump-sponsored fiscal program passed last week by the US House of Representatives.

Departure from government of the DOGE architect was not the President’s only big problem of the week. On Wednesday, the federal Court of International Trade ruled that Trump did not have the authority to impose most of the tariffs that he had levied on a number of countries. But by Thursday, the administration had appealed to the US Court of Appeals which temporarily stayed the decision. Although the government can now continue to collect tariffs, the future of the levies has become murky and may ultimately be decided by the Supreme Court.

A practical implication of the court decision Wednesday is that it weakens the hands of US trade negotiators. Foreign officials may want to string negotiations along in the hope that the US legal system would limit the President’s tariff-imposing powers before those governments have to make concessions. Markets are likely to remain volatile due to lack of clarity on what the ultimate outcome would be. Such uncertainty is also a negative factor in creating supply bottlenecks, increasing inflationary pressures, and keeping Treasury yields elevated.

I had referred to such uncertainty in last week’s SriKonomics mentioning that a tariff deal is “always subject to change by the President at a moment’s notice.” We witnessed a step in that direction over the past couple of days with Treasury Secretary Scott Bessent saying that negotiations with China were “a bit stalled” following the agreement he reached with Chinese officials in Geneva, Switzerland over the May 10 -11 weekend to suspend tariffs for 90 days and pursue talks.

The President went further. He complained yesterday on Truth Social that China had “totally violated” the preliminary deal agreement that had led him to suspend the tariffs. “So much for being Mr. NICE GUY!” he wrote as he suggested taking counter-measures. This may just be a case of Chinese officials waiting for more court reversals for Trump. Why concede now on new trade terms when the US legal system could take care of the problem by annulling the bulk of the Trump tariffs?

Given the reversals on the trade front, Trump may have been seeking relief from the US Federal Reserve when he asked for a meeting with Chairman Powell in the White House on Thursday. Powell is also the person Trump threatened recently to fire from his job before his term expires in May 2026, and who he has called a “major loser” and a “fool” for not lowering interest rates.

But the President did not get the relief he had sought.

The Fed was careful to state in its announcement that the meeting was arranged at Trump’s request and that Powell had made no policy promises to the President regarding lowering interest rates. Powell had merely told the President that interest rate decisions would be made after “careful, objective and non-political analysis” — definitely not the response that would have pleased the President.

What do all these developments mean for markets? Policy reversals on the trade and Big Beautiful Bill fronts make it a trader’s market rather than one friendly to the long-term investor.. As for the economy, last week’s developments increase my expectation of the onset of stagflation.

Dr. Komal Sri-Kumar

President, Sri-Kumar Global Strategies, Inc.

Santa Monica, California

www.srikumarglobal.com

@SriKGlobal

May 31, 2025

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