Donald Trump has already caved in on tariffs, pausing the ‘retaliatory levies’ he announced on ‘Liberation Day’ at the beginning of April. Now the President is under pressure from the markets on spending. As his ‘Big, Beautiful Bill’ on the budget goes through Congress, investors are panicking over the mix of spending and tax cuts, with bond yields spiking sharply upwards and equities falling. President Trump will now have to decide whether to yield to Wall Street again – or tough out a potential crash.
The US remains the biggest economy in the world, so investors cannot abandon it completely
The post-tariff recovery on Wall Street came to a juddering halt yesterday. A weak auction of Treasury bills, as American debt is known, sent yields sharply higher, and the S&P 500 fell 1.6 per cent as investors grew nervous over the rising cost of debt.
The reason? The budget bill is close to passing through Congress. It extends many of the tax cuts from Trump’s first term, and while it may include some increases on the rich, it won’t come anywhere close to balancing the books. It is predicted to add another $3 trillion (£2.2 billion) to the US national debt over the next decade, and the deficit this year may well hit 7 per cent of GDP, an extraordinarily high level for a peacetime economy facing no particular crisis.
That is not really Trump’s fault. He inherited a huge deficit from Joe Biden’s lavish spending on industrial and green subsidies. But no one ever said politics was fair. By nature, Trump is a big-spending politician, although in his case most of the money goes on tax breaks for business and entrepreneurs instead of on welfare spending and climate change. His instincts may well be to press on with his budget, and let the markets take care of themselves. Or he may put his faith in Elon Musk’s Department of Government Efficiency delivering the huge savings necessary to balance the books, even if there is not much evidence of it managing this so far.
The US remains the biggest economy in the world, and the dollar is its reserve currency, so investors cannot abandon it completely, no matter how worried they are about the deficit. The trouble is, Trump is facing pushback from investors, a sell-off in the bond market, and jittery nerves in equities. On tariffs, Trump reversed his policy when he saw the impact it was having on Wall Street. The markets may turn him into the president who finally starts the work of balancing the budget – because if he doesn’t, he will soon face a full-blown market crash.
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