Trump’s Tariffs Will Cut Deficits by $4 Trillion: CBO

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Reuters
By Yuval Rosenberg and Michael Rainey

Happy Friday! President Donald Trump indicated today that the controversial and locally unpopular federal crackdown on crime that he launched in Washington, D.C., will be targeting Chicago next. "I think Chicago will be our next and then we'll help with New York," Trump told reporters in the Oval Office. Here's what else is happening.

Trump's Tariffs Will Cut Deficits by $4 Trillion Over 10 Years, CBO Says

President Trump's increased tariffs will decrease U.S. government deficits by $4 trillion through 2035, according to newly revised projections by the Congressional Budget Office.

Phill Swagel, director of the nonpartisan budget scorekeeper, said in a blog post Friday that, as of this week, the estimated effective tariff rate for goods imported into the United States has risen by about 18 percentage points compared to 2024. CBO expects customs duties from new and existing tariffs will total about $200 billion this fiscal year, barring further changes. The Trump-driven increase in tariff revenue will decrease deficits by $3.3 trillion, assuming the higher tariffs remain in place over the next decade. The reduced need for federal borrowing resulting from those lower deficits would cut interest costs by $700 billion, bringing the total deficit reduction to $4 trillion.

The new estimate is significantly higher than the $2.5 trillion in deficit reduction and $500 billion in interest savings that CBO projected in June, with the upward shift due to changes in tariffs.

At the same time, CBO says that the higher tariffs enacted by the United States and its trading partners "will reduce the size of the U.S. economy" in the longer term. "That reduction in output reflects both negative and positive effects: the negative effects of higher tariffs through channels such as reduced investment and productivity, and the positive effects of additional revenues from tariffs on U.S. imports, which would reduce federal borrowing and increase the funds available for private investment," Swagel wrote.

Swagel also said that CBO's estimates are subject to "significant uncertainty" because of potential changes in how tariffs are administered and the lack of empirical evidence about the long-term effects of such high import taxes and how consumers and businesses will respond.

In addition, Trump's high current tariff rates may change as he and his administration negotiate new trade deals. They may also get wiped out by legal challenges. But if CBO's projections were to become reality, the expected revenues from tariffs - which are largely paid by American businesses and consumers - would almost offset the expected cost of the big tax-and-spending-cuts bill Trump signed into law on July 4. CBO projected earlier this month that the GOP megabill will add $4.1 trillion to the deficit over 10 years, or $5 trillion if the new law's temporary tax provisions are eventually made permanent.

Trump and the White House touted the CBO estimate, even as the president continued Republican criticisms of the budget scorekeeper. Trump posted on his social media site that "the Radical Left Representatives working at the Congressional Budget Office (CBO) have now admitted how incredible my Tariff strategy has been."

Powell Opens the Door to a September Rate Cut

Concerned about growing risks in the labor market, Federal Reserve Chair Jerome Powell on Friday opened the door a bit wider to the first interest rate cut of the year.

"The balance of risks appears to be shifting," Powell said in a closely watched speech at the annual meeting of central bankers in Jackson Hole, Wyoming. The labor market is still roughly in balance, Powell said, but it is a "curious kind of balance that results from a marked slowing in both the supply of and demand for workers." Overall, the threat of a decline in the labor market marked by higher layoffs and unemployment is growing.

At the same time, economic growth is slowing, and the effects of the tariffs imposed by President Donald Trump on consumer prices are becoming clear. "We expect those effects to accumulate over coming months, with high uncertainty about timing and amounts," Powell said. The Fed's base case is that price hikes will be relatively short-lived, a one-time hit to the economy, but there's also a chance that the tariffs could spur longer-lasting inflation.

"In the near term, risks to inflation are tilted to the upside, and risks to employment to the downside-a challenging situation," Powell said. Weighing the risk factors together, he concluded that current conditions "may warrant adjusting our policy stance." However, nothing is certain at this point, and Fed officials will continue to review new data as it rolls in.

Although Powell fell short of committing to a rate cut next month, most analysts concluded that the odds of a cut had increased significantly. Investors, many of whom have been calling for a rate cut, sent stocks sharply higher, with the Dow Jones Industrial Average jumping nearly 1.9% and the S&P 500 climbing 1.5%. Treasury rates dropped, with the 10-year falling seven basis points, and the odds of a rate cut in September jumped to 84% in the CME Group's FedWatch Tool, which measures market sentiment.

The rate-setting Federal Open Market Committee is scheduled to hold its next meeting on September 16-17.

Trump pressure: Using a mix of threats and insults, Trump has been pressuring the Fed chief to lower interest rates. Following Powell's speech, Trump told reporters that he should have lowered rates months ago. "We call him 'Too Late' for a reason," he said.

Powell did not address Trump's comments on Friday.

What the experts are saying: Analysts widely agreed that Powell's comments translate to a high probability of a rate cut next month.

J.P. Morgan's Michael Feroli wrote in a research note that "Powell's Jackson Hole remarks confirmed market and consensus expectations for the FOMC to cut the funds rate at its next meeting in mid-September." Feroli's team expects to see a 25-basis point cut, with three more later in the year.

Market strategist Peter Boockvar said he, too, is convinced that the Fed will cut rates at its next meeting. "Bottom line, today's speech could not be more clear that Powell is ready to cut rates on September 17th and the market is now fully priced for it and for a 2nd one by year end," he wrote.

Analysts at Deutsche Bank said Powell's speech was more dovish than they expected, suggesting that a 25-basis point rate cut was the most likely outcome from the September FOMC meeting. "After that, we see the Fed delivering 25bp reductions in December and March, which would bring the fed funds rate to our longer-run estimate of nominal neutral," the analysts said.

Still, not everyone is convinced that a rate cut is inevitable. Anna Wong, chief U.S. economist at Bloomberg LP, noted that Powell remains focused on the data, which could still provide an unwelcome surprise on inflation.

"So my takeaway from Powell's speech today is that a September cut is still really down to forecasting the data - the CPI and the NFP," she wrote, referring to the Consumer Price Index and Non-Farm Payroll reports. "True, the bias is somewhat in the direction of a cut, but I don't think the sureness in the market pricing accurately reflect the risk."

Trump Threatens to Fire Fed Governor Lisa Cook

President Trump told reporters Friday that he would fire Fed Governor Lisa Cook if she doesn't resign.

The president on Wednesday called on Cook to step down over allegations leveled by a Trump ally that she may have engaged in mortgage fraud before being appointed to the Fed board. In response, Cook said she has "no intention of being bullied to step down from my position" and was gathering the information necessary to answer questions about her financial history.

Why it matters: Trump's attack on Cook and threat to fire her represent an escalation in his fight with the Fed as he pressures policymakers there to lower interest rates. Forcing out Cook, a Biden appointee who has sided with Fed Chair Jerome Powell in rate-setting decisions, would give Trump the ability to nominate another loyalist to the central bank's seven-member board of governors.

Trump has already nominated Stephen Miran, the chief economist on his Council of Economic Advisers, to temporarily fill the seat vacated by the recent resignation of Gov. Adriana Kugler, another Biden appointee. Miran and any potential Trump pick to replace Cook would make Trump appointees the majority on the Fed's board of governors, possibly giving the president added sway over monetary policy decisions that were designed to be independent of political considerations.

Supreme Court Lets Trump Administration Cut Nearly $800 Million in NIH Grants

A divided Supreme Court ruled Thursday that the Trump administration can cut $783 million in National Institutes of Health grants that the government said were related to topics like diversity, equity and inclusion or promoted "gender ideology" - areas that went against President Donald Trump's policies.

In a 5-4 decision, the court sided with the Trump administration and blocked a lower court's order that the administration had to restore the grant funding. Chief Justice John Roberts Jr. joined the court's three liberal justices in dissent.

But the court also decided, in another 5-4 split, that the legal fight over the funding can continue in lower courts and signaled that the president's crackdown on DEI initiatives was in legal trouble.

Justice Amy Coney Barrett was the deciding vote in each 5-4 majority.

"Four justices would've ruled against the administration in full; four would have ruled for it in full; and Barrett split the difference - suggesting that the grant recipients are likely to prevail on their challenges to the Trump administration's anti-DEI directives, but that they can't get their grant money until and unless they bring their claims in a different federal court," Steve Vladeck, a professor at Georgetown University Law Center, told CNN. "In other words, Trump won this battle, but the grant recipients seem likely to win the war."

Number of the Day: 300,000

The director of the U.S. government's human resources department told The New York Times that there will be about 300,000 fewer federal workers by the end of this year than there were in January.

"That's roughly like 2.4 million to start and ending roughly about 2.1 million," Scott Kupor, the director of the Office of Personnel Management, told the Times in an interview on Thursday. The cuts would reportedly be the largest one-year reduction in the federal workforce since World War II.

Kupor reportedly said that the resignation offers introduced by the Trump administration's Department of Government Efficiency accounted for most of the staffing reductions and most of the departing employees have already stopped working even though they remain on the payroll. The voluntary resignations reportedly were large enough that agencies didn't have to follow through with large-scale layoffs that had been planned.

"I think the agencies expected they would have fewer people in the, call it 'voluntary bucket,' and they would therefore have to do more in the 'involuntary bucket,'" Kupor told the Times.

In some cases, the cuts went too deep and agencies had to hire back workers.

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