Economic Tailwinds Will Help the US Overcome Tariff Headwinds

Its strong institutions and zest for innovation will keep growth going even as Trump is forced to back-track on his policies

- NOURIEL ROUBINI

Last December, I argued that while some of US President Donald Trump's policies would be stagflationary (reducing growth and raising inflation), such effects would ultimately be mitigated by four factors: market discipline, an independent US Federal Reserve, the president's own advisors and the Republicans' thin majorities in Congress.

The script has played out as predicted. The reaction from stock, bond, credit and currency markets forced Trump not only to back down from his 'reciprocal' tariffs against most of America's trade partners, but also to beg China to sit down and negotiate. In the game of chicken between Trump and Chinese President Xi Jinping, Trump lost. Market traders trumped the tariffs, and bond vigilantes proved more powerful even than the US president—just as the political strategist James Carville observed a quarter-century ago.

Then came the game of chicken with Fed Chair Jerome Powell. Again, Trump was the first to blink. Markets swooned when he suggested that he would fire Powell, and he soon back-pedalled, declaring that he has "no intention" of doing so. Meanwhile, Powell has made clear that the president has no lawful authority to remove him.

Similarly, while [trade extremists] like Peter Navarro, Trump's main trade advisor, initially gained the upper hand—appealing to Trump's self-image as "Tariff Man"—this did not last. Once markets stumbled, those advocating an 'escalate to de-escalate' tariff strategy, such as treasury secretary Scott Bessent and Stephen Miran, the chair of the Council of Economic Advisers (a former colleague of mine), seemed to prevail.