As we navigate through the current economic landscape, it’s helpful to break down President Trump’s key policy initiatives into what I refer to as his “4 Buckets.” This framework helps us understand the broader objectives of his agenda by focusing on the main themes. These four buckets are:

1. Raising tariffs on imports
2. Deporting undocumented immigrants
3. Tax reform (now dubbed the “Big Beautiful Bill” or BBB)
4. Efforts to eliminate waste, fraud, and abuse in government spending

As we’ve seen since the beginning of the administration, there has been progress on all fronts. Today, I’ll be focusing on two of the most impactful policies: tariffs and the BBB. Now that we have more details, it’s time to assess their potential economic consequences.

Tariffs and Their Economic Effects

Tariff rates have fluctuated significantly in recent months. As of mid-May, tariffs on Chinese imports averaged about 33.2%, with imports from other countries facing an average of 11%. This constant shifting of rates has created uncertainty, but here’s what we can expect if the current structure remains in place:

• An additional $200 billion annually in federal tax revenue over the next decade, assuming no retaliation from foreign countries.
• A potential reduction in GDP growth by 0.7% per year.
• A short-term increase in consumer prices (inflation) by approximately 1.4%.

While these figures aren’t set in stone, they align with earlier predictions that higher tariffs would lead to slower economic growth and higher inflation. This notion is gaining traction as more analysts reach similar conclusions.

It’s important to note that the effects of tariffs, particularly when combined with other policies such as deportation, could lead to economic friction. This analysis focuses purely on the economic implications, leaving aside long-term goals such as revitalizing U.S. manufacturing or reinforcing national sovereignty—effects that we will need to monitor as time goes on.

The Big Beautiful Bill: Economic Potential and Risks

The BBB is still making its way through Congress, and while there are many unknowns, early data gives us some insights into its potential impact. According to the Tax Foundation, the bill could increase GDP growth by about 0.8% annually, but it would also add approximately $170 billion to the federal deficit each year.

Given the number of variables still at play, it’s difficult to predict the exact outcomes of the bill. However, the preliminary analysis suggests that it could support economic growth and help ease inflationary pressures. The trade-off here is that these gains would come at the cost of higher deficits, which would place additional stress on the Treasury bond market.

From a broader economic perspective, the impact of both tariffs and tax reforms may cancel each other out in terms of GDP growth. However, both could contribute to rising inflation and a higher federal deficit, which is projected to increase by about $100 billion annually under current policies.

Short-term benefits from the BBB appear limited, but one potential advantage could be avoiding significant tax hikes if current cuts are not extended. For now, though, this policy remains in development and is still a work in progress.

Treasury Credit Rating Concerns

A significant development in recent months is the downgrade of U.S. Treasury debt by Moody’s, following similar actions by Standard & Poor’s and Fitch. This downgrade has lowered the U.S. credit rating from its AAA status. Interestingly, only ten foreign countries and two U.S. companies—Microsoft and Johnson & Johnson—maintain a pristine credit rating. This is a striking comparison, as companies like Johnson & Johnson are now considered more creditworthy than the U.S. government.

This downgrade has raised concerns about the sustainability of the U.S. fiscal policy. With high deficits expected to continue, some economists are warning that failure to address these issues could lead to significant financial consequences down the road. The yield on the 10-year Treasury note has been on the rise, reflecting growing caution among investors. Deutsche Bank economists have highlighted the risk of deficits exceeding 6% of GDP in the coming years, which is seen as unsustainable in the long term.

While we have not yet seen any immediate market repercussions, there is growing concern that without meaningful fiscal action, the U.S. could face a financial reckoning in the near future.

Conclusion

In sum, the economic landscape remains in flux as key policies unfold. The combined effects of tariffs, tax reform, and fiscal policy adjustments will likely continue to influence the broader economy. While there are potential short-term gains, especially in terms of avoiding major tax hikes, the long-term impacts remain uncertain. With concerns over rising inflation and deficits, it’s clear that fiscal discipline will be essential to maintaining economic stability in the years ahead.