In recent discussions surrounding the U.S. economy, President Donald Trump and Treasury Secretary Scott Bessent are advocating for lower interest rates to mitigate the financial burden posed by the nation’s towering debt, which is projected to reach $1 trillion in net interest by fiscal year 2025.
Federal Reserve Chair Jerome Powell has faced mounting pressure from Trump to cut rates, but he remains cautious, wishing to observe the effects of Trump’s tariff policies on consumer price inflation. With unemployment levels being relatively low, the Consumer Price Index (CPI) climbing at an annual rate of 2.7 percent, and the stock market hitting unprecedented heights, there seems to be little justification for rate cuts at this time.
Frustrated by Powell’s reluctance, Bessent recently announced that measures are being taken to replace Powell with a candidate more amenable to Trump’s demands for lowering interest rates before Powell’s term ends next year.
An effective approach to reducing interest rates could be through eliminating deficit spending. A balanced budget would alleviate the need for new debt issuance, as the Treasury could focus solely on financing existing debt. In such a scenario, the supply of Treasuries would shrink, potentially lowering interest rates and aiding Trump and Bessent in their quest for lower borrowing costs.
Instead of making Congress prioritize a balanced budget, Trump has opted for his ambitious One Big Beautiful Bill Act, which combines tax reductions with increased spending, adding over $3 trillion in new debt over the next decade. This is expected to propel the national debt beyond $60 trillion by 2040.
Can Tariffs Help Reduce the Deficit?
This surge in debt diminishes the likelihood of lowering interest rates. Nevertheless, Trump is optimistic that tariffs can play a role in enhancing revenue and, consequently, reducing the budget deficit.
Up until the June Treasury Statement revealed a surprising surplus of $27 billion, forecasts pointed toward a $2 trillion budget deficit for fiscal year 2025. This surplus, the first June surplus since 2017, followed a $315 billion deficit in May, hinting that tariffs may indeed have positively impacted the budget.
The June report indicated that customs duties amounted to $27 billion, a notable increase from $22 billion in May. Additionally, tariff revenue from October onward reached $108 billion, the highest recorded for the initial nine months of a fiscal year, compared to just $56 billion collected by this point in the fiscal year 2024.
Bessent noted in a recent cabinet meeting that the U.S. could potentially raise tariff revenues to $300 billion by the end of calendar year 2025. Trump expressed confidence that “the big money will start coming in on August 1.” However, specifics on this projected revenue surge were not forthcoming.
Understanding Tariffs
The fluctuating state of Trump’s tariffs can be challenging to track. By April 2025, the average U.S. tariff rate had reportedly jumped from 2.5 percent to an estimated 27 percent—the highest level in over a century.
Trump’s strategy often involves announcing tariffs only to pause them during negotiation periods, before reinstating or modifying them. After instituting reciprocal tariffs on Liberation Day, April 2, 2025, a universal 10 percent tariff was initiated, with additional tariffs for 57 trading partners initially planned but later suspended when financial markets reacted negatively.
This pause on reciprocal tariffs has now been extended to August 1. Trump has sent letters to various countries outlining new tariff rates, which he believes will contribute to the anticipated influx of revenue.
While reducing the budget deficit through increased tariff revenue seems promising, the potential consequences are significant.
Trump’s tariff policies aim to safeguard domestic production, bring manufacturing jobs back to the U.S., and decrease the trade deficit. However, there’s a downside: these policies often lead to higher prices for consumers.
Simply put, tariffs act as taxes. They are not shouldered by foreign producers out of goodwill; instead, they are fees imposed on imported goods. Ultimately, these costs are passed down to consumers. When Trump levies tariffs of 10, 25, or even 60 percent on goods from various countries, that additional expense gets factored into retail prices. Importers, distributors, and retailers all end up charging more, and consumers ultimately bear the brunt of these costs.
Fire the Fed, Raise Tariffs, and Hope for the Best
Tariffs impact nearly every consumer product on the market, including clothing, electronics, automotive components, and raw materials. A significant portion of these goods comes from outside the U.S., and imposing tariffs drives up their market prices.
Businesses already operating on slim profit margins are faced with two options: absorb the higher costs, risking their viability, or pass those costs onto consumers. Most retailers will choose to raise prices, as this is often essential for survival.
Furthermore, tariffs inherently reduce competition, leading to increased consumer prices and diminished motivation among domestic industries to manage costs. Without pressure from foreign competitors, there’s less incentive to innovate, cut expenses, or offer competitive pricing.
Why should domestic producers lower prices when the competitive landscape is skewed in their favor? This dynamic fosters complacency, resulting in higher costs for everyone and a reduction in choices and quality for consumers.
Trade tariffs also disrupt complex economic supply chains. For instance, tariffs on steel do not merely inflate the cost of imported steel; they elevate prices for every product reliant on steel, from cars to household appliances.
The cumulative effects of such policies represent a direct threat to the purchasing power of average Americans, leading to diminished real wages and increased living expenses.
The higher prices induced by tariffs act as an indirect tax on every household, eroding savings and complicating financial stability. Relying on tariffs and artificial rate cuts to address the budget deficit seems misguided, with consumers ultimately footing the bill for the anticipated “big money” Trump envisions.
The authentic solution lies in reducing spending. Yet political realities often impede such necessary reforms.
Thus, the cycle of fiscal folly continues.
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Sincerely,
MN Gordon
representing Economic Prism
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