We just saw inflation go negative for the first time, I believe it was since 2020. The monthly rate of inflation turned negative, decreasing by 1% on a month-to-month basis. The overall headline inflation number also declined from 2.8% down to 2.4%. This is still above the Federal Reserve’s 2% inflation target, but it’s an important development. While this is a positive step, it’s still above the central bank’s long-term inflation target, which is 2%.
Tariffs and Market Reactions
Welcome to Reporter Notebook, where we talk to the Washington Examiner’s top journalists about the stories breaking on their beats. I’m Jim Anthony, and I’m joined today by economics reporter Zack Hellishack. Zack, we’ve had a lot of uncertainty in the markets this week, especially with President Trump’s tariffs. Where do things stand right now?
Zack: It’s been a roller coaster week for Wall Street, and investors are still very uncertain about what’s to come. Here’s where we stand: Trump announced sweeping tariffs, 10% across the board, then much higher rates on certain countries based on trade deficits and other factors. The markets initially reacted negatively, with stocks plunging. For several days, the market continued its downward trend. Then we got some news that the president might loosen these tariffs, and the market shot up, gaining about a thousand points. But that wasn’t the end of the story.
Later, the president clarified that the higher tariffs on China would be increased to 145% instead of the initially expected 125%. As a result, the market began to drop again. This back and forth is indicative of the uncertainty surrounding the tariff agenda.
Then on Wednesday, we saw a rollback where Trump announced that the 90-day suspension on higher tariffs would take place. However, the 10% universal tariffs would remain in place. This was a relief for the markets, and we saw significant gains, marking the highest growth in certain indices since 2008. The market responded enthusiastically to this development, signaling relief. But the very next day, as the administration clarified that the effective rate on China was 145%, the market dropped again. It’s clear that the markets are being heavily influenced by the shifting tariff landscape, and it’s likely to be a wild ride for Wall Street in the coming weeks.
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A Roller Coaster of Political and Economic Events
What’s unusual here is that the tariff rollback was announced while Trump’s own trade representative, Jameson Greer, was testifying on Capitol Hill about these tariffs. It appears that Greer found out about the decision while testifying. The whole week has been full of unexpected twists and turns in tariff discussions, which have left investors scrambling to make sense of it all.
The president mentioned that he thought the markets and people were getting anxious, so it was time to dial things back a bit. It’s always a balancing act—if the market continues to decline, it could signal the onset of a recession. I spoke with several Senate and House Republicans, and most of them are in a “wait and see” mode when it comes to tariffs. Many Republicans aren’t particularly fond of tariffs but are willing to give the process a chance. The Trump administration also seems uncertain about the long-term outcomes of these decisions. It’s essentially a “build the plane as you fly it” situation.
The Inflation Outlook
In the midst of all this uncertainty, there’s been some positive news: inflation. We just saw inflation go negative for the first time since 2020. The monthly rate of inflation decreased by 1%, and the headline inflation figure fell from 2.8% to 2.4%. While still above the Federal Reserve’s 2% target, this decrease is more than expected. Investors had anticipated a decrease to 2.5%, so the actual drop came as a surprise.
The drop in inflation can be attributed to several factors, including lower energy prices. However, the Federal Reserve and the president would both like to see further progress on inflation. Despite this positive news, the issue of tariffs remains a significant factor affecting the inflation outlook.
Federal Reserve Chairman Jerome Powell has noted that tariffs are influencing the inflation outlook, and the Fed is now anticipating that inflation will likely be higher at the end of the year than it was projected to be before Trump took office. The sweeping tariffs are affecting the global economy and, in turn, the broader U.S. economy.
Child Tax Credit Discussions
In the midst of all this economic turbulence, there’s also been a strange political coalition forming behind a child tax credit proposal. A growing number of Republicans are calling for an increase in the size of the child tax credit. The tax credit was doubled in 2017 as part of the Tax Cuts and Jobs Act, and now some Republicans are pushing for it to be expanded even further. This is notable because, just a decade ago, you wouldn’t have seen many Republicans advocating for more federal spending on child tax credits. Traditionally, this has been a Democratic priority, but now Republicans are getting behind it as well.
In 2021, Democrats temporarily increased the child tax credit, but now we’re seeing more bipartisan support for expanding it even more. A report from Third Way, a center-left group, came out this week proposing several different options for expanding the child tax credit. They recommend indexing the credit to inflation, as the value of the $2,000 tax credit from 2017 is now worth less due to inflation. Some Republicans in the House have expressed support for this idea.
There are also proposals for a “baby bonus” where, during the first year of a child’s life, the child tax credit would be increased. This has become part of a broader push by Republicans to support family development. Republicans like JD Vance have championed causes related to family-building and supporting children. It’s likely that we’ll see this issue play out in the coming year as part of a larger fiscal package being crafted through the reconciliation process.
The Road Ahead
Looking ahead, it’s clear that the next year will be full of uncertainty, both in the markets and in Washington. Investors and politicians alike are trying to figure out the long-term impacts of tariffs, inflation, and fiscal policies like the child tax credit. The situation is fluid, and as we’ve seen this week, a small change in policy can lead to dramatic fluctuations in the market.
The road ahead will likely be shaped by these economic developments, and both investors and lawmakers will need to stay agile as they navigate through this period of uncertainty.
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Conclusion
This week has been a tumultuous one for both the markets and the political landscape. The uncertainty surrounding tariffs, inflation, and fiscal policies continues to shape the decisions of investors and lawmakers. As we look ahead, it’s clear that we’re in for a wild ride in the coming weeks and months. The next steps in the tariff negotiations and the potential expansion of the child tax credit will have far-reaching implications for the economy. The coming year will likely bring more surprises as these issues evolve.