While none of the central banks’ decisions came as a surprise (the Bank of Canada cut interest rates by 25 basis points, the Fed held them steady, and the Central Bank of Brazil raised them by 100 basis points), economic strategy was deeply embedded in what was being said.
Even before their meetings, the Financial Times ran a headline straight out of the 1920s, reporting that the Bank of England is “bleeding”… gold as bullion flows to the US to forestall potential tariffs.
Gold supporters will point to the inflationary risks from Trump and agree, while gold has been heading towards the US and away from the UK, where Chancellor Reid has tried to convince markets of her aggressive growth policies, just months after a budget that businesses have deemed too conservative.
The Bank of Canada has not given any guidance due to the risk of 25% tariffs from the US in the coming days: and despite declaring “inflation is over”, its Governor has hinted that if tariffs are imposed, the Bank will need to intervene… but how?
By cutting or raising interest rates in a period of inflationary boom and deep recession (according to DeepSeek)?
The Fed has said that asset prices are high, while interest rates are well above neutral (!) – but it is in no rush to cut rates because it needs to wait to assess Trump’s policies.
President Trump has launched an attack on the Fed on social media (he proposes rate cuts, the Fed rejects them). However, the White House will approve the statement on cryptocurrencies. More digital asset bubbles or an economic strategy that will be inextricably linked to politics, given that the White House has already banned all CBDCs in favor of “Made in America” digital assets?
To be fair to the Fed, economic strategy is beyond the purview of conventional economists and policymakers.
Huge tax and spending cuts
The White House may now challenge the Impoundment Act of 1974 for undermining the executive branch’s ability to ensure fiscal responsibility. It argues that it should have the power to withhold funds that “exceed legislative intent” or “conflict with constitutional obligations” if they undermine national security because they constitute fiscal waste.
At the same time, the argument is made that the president should be able to fire civil servants more easily and limit the salaries and spending of independent agencies.
In other words, the White House is seeking to reverse the logic of “the president proposes, Congress decides,” adding “and the president rejects.”
In energy, if the US activates the Defense Production Act, then oil prices could fall significantly. For example, the Secretary of the Interior has just been added to the National Security Council, as his responsibility includes mining and critical minerals.
In trade, the nominee for Secretary of Commerce, Latnick, supports the imposition of universal tariffs with the aim of returning industrial production to the US. It is worth noting that lower energy prices could mitigate inflationary pressures from rising tariffs.
In the labor market, President Trump plans to send up to 30,000 undocumented immigrants to the Guantanamo Bay detention center as a pressure measure to end what he sees as a national security issue due to open borders. (At the same time, mass layoffs of federal employees could fill some, if not all, of the job openings that would result from the crackdown on immigration.)
In exchange rate policy, this policy mix would lead to a much stronger dollar. However, lower inflationary pressure in the US (and therefore lower interest rates?) could partially mitigate this trend. At the same time, the dollar – and only the dollar – would be integrated into a US/Western cryptocurrency network to enhance its use.
This is a possible version of Trump’s economic strategy, which links different policies together.
Central banks should take it seriously, rather than focusing on individual economic policies such as tariffs.
However, there are other scenarios that could emerge if the tools of economic strategy are not properly aligned – which could lead to completely different macroeconomic and market developments.
Competitiveness Compass
In this context, the President of the European Commission, Ursula von der Leyen, yesterday presented a new Competitiveness Compass, based on the conclusions of the Draghi Report. The plan includes:
- AI Gigafactories
- Action Plans for quantum technology, biotechnology, robotics and space technologies
- EU Start-up and Scale-up Strategy
- Roadmap for decarbonisation and competitiveness
- Clean Industrial Deal to promote clean technology and new circular business models
- Affordable Energy Action Plan
- Industrial Decarbonisation Accelerator Act
- Tailored Action Plans for energy-intensive sectors
- Clean Trade and Investment Partnerships
- New public procurement rules, potentially allowing the introduction of a “European preference” in critical sectors and technologies
- Reducing the administrative burden by at least 25% for businesses and 35% for SMEs
- Horizontal Single Market Strategy to modernise the European governance framework
- European Savings and Investment Union, aiming to create new savings and investment products for the smooth flow of investment across the EU
- Union of Skills
- Competitiveness Coordination Tool to improve policy coordination at national and European level
Objectively, even drafting this abridged version of the plan is exhausting. What emerges is a costly, unfunded, overambitious, acronym-laden, centrally directed EU industrial policy that will require radical reforms, constant oversight and strict control, while supposedly cutting red tape and boosting market dynamics.
More importantly, it has not secured the buy-in of EU national governments. Only the Horizontal Strategy for the Single Market and the Savings and Investment Union have any significant impact. Mario Draghi has warned that if this strategy is not implemented, Europe will face a “slow agony”, which, given global developments, may not be so slow. But if implemented, this unwieldy EU economic model will come up against China’s hyper-focused strategy and the US’s “Hamiltonian” policy, based on massive deregulation and state intervention in markets behind a tariff wall.
As a result, ECB President Christine Lagarde cut interest rates by 25 basis points, following the lead of the Bank of Canada and the Fed, while at the same time highlighting the extreme uncertainty about the economic outlook.
However, she will also repeat the well-known argument that “if there is no geopolitical crisis, then X, Y, Z will happen.”
But let’s be honest: this is no way to make predictions, at least not with realistic risk criteria. Central banks and markets must understand the Grand Chessboard of World Trade, the economic strategy of states, and the Grand Macroeconomic Strategy that is taking shape before us.
