Weekly Global Economic Update

Week of February 24, 2026

• US Supreme Court disrupts the global trade regime
• US GDP growth decelerates
• US consumer spending grows slowly while inflation accelerates

US Supreme Court disrupts the global trade regime

• Global investors recently absorbed three important news items. First, the US Supreme Court ruled that the US tariffs implemented on the basis of a national emergency are unlawful. Second, the US government reported a sharp slowdown in economic growth in the fourth quarter. And third, the government reported that inflation accelerated in December. Normally, the reports on GDP growth and inflation would have led to a decline in equity prices. But this was overshadowed by the tariff news. Thus, equity prices increased modestly. Still, the tariff news creates an added element of uncertainty. Let’s first look at the ruling by the Supreme Court.

The US Supreme Court, in a six to three ruling, said that the tariffs implemented by the Trump Administration on the basis of the International Emergency Economic Powers Act (IEEPA) are unlawful. IEEPA was passed in 1977 and gives the president authority to restrict economic relations with other countries when there is a national emergency. The law makes no reference to tariffs. The administration implemented multiple tariffs on almost every country in the world in 2025. It was the first time that tariffs were implemented on the basis of IEEPA. In the court hearing, the administration argued that the US trade deficit represents a national emergency and that tariffs are needed to reduce the deficit. The plaintiffs argued that a decades-long persistent trade deficit is not an emergency and that the law was not meant to be used in this manner. The court agreed with the plaintiffs.

Many business groups welcomed the ruling and some expressed expectations that companies might be reimbursed for tariffs already paid. However, the court offered no indication as to whether refunds will be required. Meanwhile, there are already legal proceedings in which some companies are seeking refunds. This process will likely take a long time and will most likely be done on a case-by-case basis. If a substantial amount of money is refunded, it will add to the government’s fiscal deficit and will have a stimulative impact on the economy. On the other hand, it is likely that the administration may pivot toward other legal tariffs. In that case, the fiscal impact of the ruling could be muted.

During the past year, the administration used tariffs and the prospect of higher tariffs to pressure other countries to make trade deals. In most such agreements, the United States left in place historically high tariff rates, often in the range of 15% to 20%. Yet it refrained from even higher tariffs that had been initially proposed. In exchange, other countries agreed to reduce their tariffs. More importantly, other countries agreed to boost purchases of US goods and, in some cases, agreed to invest more in the United States. With the IEEPA tariffs gone, it is not clear what will happen to these agreements. The United States may no longer have the kind of leverage it did, although it is widely expected to pivot to a new set of legal tariffs.

What are the ways in which the United States might implement tariffs to replace the revenue from the IEEPA tariffs? Although the US Constitution gives the US Congress sole authority to impose tariffs during peacetime, the Congress has passed four laws giving the president authority to impose tariffs under limited circumstances. However, two of these laws have remained dormant for 50 and 100 years, respectively. Here are the laws that can be used.

Section 122 of the Trade Act of 1974 gives the president authority to impose tariffs to address a balance of payments deficit. However, the law has never been used. Moreover, the United States does not have a balance of payments deficit. Rather, it has a trade deficit. These are very different things. When a country has a fixed exchange rate, it must intervene in currency markets to maintain the fixed rate. This leads to either balance of payments deficits or surpluses. Yet the United States allows the dollar to float, in which case the balance of payments is roughly zero. Meanwhile, section 122 requires that the president determine that there are “fundamental international payments problems” before imposing tariffs. President Trump said he is imposing an across-the-board 10% tariff in accordance with section 122. These tariffs will go away in 150 days unless Congress extends them.

Section 338 of the Tariff Act of 1930 authorizes the president to use tariffs to retaliate against foreign discrimination against US goods. This authority was part of the Smoot Hawley Tariff Act and has never been used. It was meant to deal with countries that treat US goods differently from goods coming from other countries. Given the multilateral trade agreements that have been agreed upon in the past half century, many of which bar discriminatory behavior, this is really a moot point.

Section 232 of the Trade Expansion Act of 1962 authorizes the president to restrict imports of goods when their importation threatens US national security. This authority is currently in use to limit imports of steel, aluminum, and semiconductors, which are deemed vital to US national security. However, it would be difficult to make the case that imports of hundreds or thousands of products should be limited because of national security concerns. Excessive use of section 232 would likely lead to legal challenges.

Finally, section 301 of the Trade Act of 1974 authorizes the US Trade Representative (USTR) to investigate unfair foreign trade practices and recommend tariffs accordingly. This provision has been used extensively, but it is time-consuming. One recent example is the imposition of tariffs on some products from China due to violations of intellectual property protection. If the administration attempts to implement across the board tariffs using section 301, it would likely be met with criticisms that the administration is simply attempting to replace IEEPA tariffs. A legal challenge would be very likely. Meanwhile, the administration said it plans to initiate new investigations related to this law.

Whatever path the administration chooses going forward, its range of options now appear to be more limited than when it used IEEPA. Once new tariffs are introduced, two things are likely. First, the preponderance of tariffs is expected to shift from being country-specific to product-specific. Second, while the new tariffs will likely leave in place a very high average tariff rate, the specific impact on different industries and companies will vary and could be very different than previously. Until this happens, uncertainty is likely to remain.

What was the economic impact of the IEEPA tariffs and what will the impact be of removing them? A tariff is a tax on imports paid by the importer. Often, the importer will pass on the cost of the tariffs to their customers, whether they be consumers or other businesses. When this happens, inflation rises and the real (inflation-adjusted) purchasing power of consumers declines. Moreover, tariffs on globally competitive companies increase their costs of doing business, thereby potentially reducing their competitiveness in global markets.

In the case of the IEEPA tariffs, inflation for traded goods did increase, but not as much as anticipated. In many cases, companies absorbed the cost to maintain market share. They either took a hit to their profits, or they reduced other costs such as labor. Thus, the tariffs were not as impactful as had been anticipated. Further passthrough in 2026 had been anticipated. Perhaps the biggest impact of the IEEPA tariffs was uncertainty. That is, the rapid and unpredictable manner in which tariffs were introduced, postponed, and reversed created an uncertain business environment for globally exposed companies. This, in turn, likely caused many companies to postpone investments in their supply chains.

The IEEPA tariffs had a big impact on trade flows. In the past year, US imports from China, Japan, the European Union, and many other countries declined sharply due to tariffs. For US trading partners, this development led to a significant shift in policy. Many countries sought to liberalize trade with countries other than the United States and succeeded in boosting export growth to other countries. In the case of China, for example, aggressive pricing of exports led to strong growth of exports to non-US countries. In addition, many countries shifted toward efforts to stimulate domestic demand to offset the loss of exports to the United States. This was true of China, Japan, and several European countries. The end of IEEPA tariffs is therefore likely to especially affect China and Brazil, the two countries with the highest tariffs imposed by the current administration.

Going forward, the end of IEEPA tariffs, if not offset by new measures, could lead to lower inflation and increased consumer purchasing power in the United States. Yet other tariffs are likely to be implemented, in which case there might be no significant impact on inflation or purchasing power. Meanwhile, uncertainty will remain—at least for a while. It is uncertain as to which new tariffs will be introduced. Perhaps the biggest impact of ending the IEEPA tariffs will be geopolitical. That is, other countries may be somewhat less vulnerable to tariff decisions by the United States. Plus, the end of IEEPA tariffs could revive exports from many countries to the United States.

Finally, the recent ruling was met by a modest increase in equity prices, a modest rise in bond yields, and a modest decline in the value of the US dollar. Many investors are anticipating a temporary reprieve from tariffs but a longer-term continuation of high tariff rates.

US GDP growth decelerates

• As if the tariff news wasn’t enough, the US government also released its first estimate of fourth quarter 2025 growth of real GDP: Growth was much slower than in the previous two quarters. Moreover, more than half the growth of real GDP in the fourth quarter was attributable to investment in information technology equipment and investment in software. Lately, these two categories have been driven by construction of data centers for AI. Thus, investment in AI fueled the modest growth of the economy in the fourth quarter. Plus, for all of 2025, such investment accounted for more than one-quarter of real GDP growth. Here are the details of the latest release.

The US government reported that, in the fourth quarter of 2025, real GDP grew at an annualized rate of 1.4%. This was down from 4.4% in the third quarter and 3.8% in the second quarter. Real GDP declined in the first quarter due to a surge in imports in anticipation of tariffs. Excluding the first-quarter distortion, fourth-quarter growth was the slowest since the first quarter of 2024.

Real consumer spending grew at a rate of 2.4%, but this was mostly due to services. Spending on durable goods declined sharply while spending on non-durables increased modestly. The decline in durables included a sharp decline in spending on motor vehicles. The biggest growth of consumer spending came in health care services, which accounted for over 40% of real GDP growth. Thus, health care and investment in AI accounted for almost all GDP growth.

As for investment, non-residential fixed investment was up at an annualized rate of 3.7% in the fourth quarter. However, investment in structures declined 2.4%, the eighth consecutive quarter of decline. This included office buildings, shopping centers, factories, and warehouses. Investment in equipment (computers, vehicles, telecoms) rose 3.2% and investment in intellectual property (software, R&D) rose a strong 7.4%. Residential investment fell 1.5%. This was the sixth time in the last seven quarters that it declined.

Exports of goods fell at a rate of 1.8% while imports of goods fell at a rate of 2.8%. Exports and imports of services both increased. Finally, government purchases fell sharply, mainly due to the temporary government shutdown.

Overall, this report signals a deceleration in economic activity. Moreover, to the extent that activity grew, it was mainly fueled by investment in AI and consumer purchases of health care services. Excluding these categories, overall economic activity appears to have been limited. What accounts for the underlying softness? One reason is the lack of meaningful job growth in the fourth quarter. This contributed to the weak growth of consumer income. In fact, the GDP report indicated that real disposable personal income rose at an annualized rate of only 0.1% in the fourth quarter. In addition, tariffs likely contributed to the weakness in spending on durable goods. That could change now that the Supreme Court has ruled against many of those tariffs.

US consumer spending grows slowly while inflation accelerates

• The US government also reported on consumer income and spending in December, as well as the Federal Reserve’s favorite measure of inflation. Here are the details.

In December, real disposable personal income (which excludes the impact of inflation and taxes) remained unchanged from the previous quarter while real consumer spending rose a modest 0.1%. With spending growing faster than income, this means that households saved less. In fact, the personal savings rate fell from 3.7% in November to 3.6% in December. Moreover, the savings rate has been falling steadily since April 2025 when it peaked at 5.5%.

As for real spending, all the growth in December was due to services. Real spending on durable goods declined 0.9% from the previous month, while real spending on non-durable goods declined 0.3%. Real spending on services, however, rose 0.3%. Real spending on durables declined 2.8% from a year earlier. It is likely that the weakness of durables was related to tariffs.

Finally, the government released data for the personal consumption expenditure deflator (PCE-deflator), which is the favored measure of inflation for the Federal Reserve. The PCE deflator rose 2.9% in December versus a year earlier. This was the highest since March 2024. Recall that the separate consumer price index (CPI) declined sharply in December and January. Yet that indicator was distorted by the government shutdown. The PCE deflator is thus, for now, a much more accurate reading of inflationary pressure.

Meanwhile, when volatile food and energy prices are excluded, the core PCE-deflator rose 3% in December from a year earlier. This was the highest since April 2024. Thus, it appears that underlying inflation is accelerating modestly. In addition, the PCE-deflator for durable goods rose 2.1% from a year earlier. This was the highest since November 2022. Moreover, excluding the pandemic period, this was the highest since 1994. It is likely that this rise in prices was because of tariffs. In addition, the PCE-deflator for non-durables rose 1.6% while the indicator for services rose 3.4%.

The latest inflation information appears to be broadly consistent with the Federal Reserve’s current reluctance to pursue further cuts in the benchmark interest rate. However, two factors could change things. One is the Supreme Court decision on tariffs. The other is the anticipated installation of Kevin Warsh as Fed Chair. Warsh has previously expressed his support for further rate cuts.

Week of February 16, 2026

• The debate about the impact of productivity growth on inflation
• The lingering impact of the government shutdown suppresses US inflation
• US job growth was deceptively strong in January
• Japanese election heralds new economic policy path
• European economy shows signs of strength

The debate about the impact of productivity growth on inflation

• The appointment of Kevin Warsh as the next chair of the US Federal Reserve Board has renewed the debate around the relationship between productivity growth and inflation. The debate centers around Warsh’s view that the Fed can cut short-term interest rates because AI-related productivity growth could help suppress inflation, thereby enabling lower interest rates.

The Warsh argument—augmented by comments from US Treasury Secretary Bessent—is based on the idea that the current moment resembles the 1990s. As the argument goes, in the 1990s, Fed Chair Alan Greenspan kept interest rates low because he foresaw productivity gains from investments in information technology. Greenspan was correct and, indeed, productivity growth accelerated in the late 1990s. But that didn’t suppress inflation. Plus, the Fed actually raised rather than cut interest rates when inflation started to accelerate, which was itself the result of rapid economic growth.

In a Financial Times piece, Harvard economist and former Obama-era economic adviser Jason Furman wrote that it is true that labor productivity growth can reduce inflation because it enables businesses to boost wages without increasing prices. Yet, Furman also notes that productivity growth leads to faster economic growth—potentially driving increased consumer spending and business investment—thereby creating capacity constraints and causing a rise in prices. As such, faster productivity growth could imply a higher neutral real (inflation-adjusted) interest rate. In that case, the economy can grow rapidly with high interest rates.

Getting back to the mid-1990s, the Fed’s benchmark interest rate was steady at about 5% for many years—significantly higher than inflation, which was mostly between 2% and 3%. This means that the Fed kept the real interest rate relatively high, certainly compared to today. Moreover, starting in 1999, the Fed began to increase the benchmark interest rate, peaking at 6.5% in 2000. A recession began in early 2001.

Meanwhile, although many analysts expect a productivity boost from AI, there is considerable disagreement as to when this will happen. So far, it hasn’t happened. The productivity gains in recent quarters took place only in the technology sector. Most other sectors have yet to see productivity gains or even widespread AI adoption. Thus, even if Warsh’s argument is correct, it might be too early to discuss cutting interest rates due to productivity gains. Thus, an early reduction in the Fed’s benchmark interest rate could lead to higher inflation.

The lingering impact of the government shutdown suppresses US inflation

• US inflation decelerated significantly in January, which could reflect economic weakening, but very likely also reflects the lingering impact of the government shutdown in late 2025. The shutdown meant that the US Bureau of Labor Statistics, which compiles consumer price data, was unable to collect data in October last year.  Consequently, it simply assumed no change in prices between September and October. This meant that the estimated inflation level for November was artificially low. But it also means that there will likely be lingering effects from this distortion into early 2026. In fact, Moody’s estimates that the January annual inflation estimate, which was 2.4%, would be 0.3 percentage points higher at 2.7% if not for the impact of the government shutdown. In any event, let’s look at the data:
  •  In January, the US consumer price index (CPI) was up 2.4% from a year earlier, with prices rising 0.2% from the previous month. The annual rate was the lowest since April 2025. However, energy prices fell in January while food prices increased sharply. When volatile food and energy prices are excluded, core prices were up 2.5% from a year earlier and up 0.3% from the previous month.
  • Notably, there doesn’t seem to be much evidence of tariffs boosting inflation significantly. On the other hand, prices were up sharply in some categories that involve lots of immigrant labor. For example, the price of food eaten away from home was up 4% from a year earlier, while the price of home health care increased 12.7%. About 40% of workers in the latter category are foreign-born.
  • In response to the favorable inflation report, bond yields eased slightly, while equity prices increased moderately. However, if investors believe that inflation is down significantly, they would probably expect the Fed to cut interest rates. Yet, that is not the case. Instead, expectations for Fed rate cuts have declined. As such, it appears that investors are discounting the favorable inflation report because of the government shutdown.
  • The futures market’s implied probability of a rate cut in March is now 9.8%—up slightly from yesterday but down sharply from the 18.4% probability a week ago, and the 26.5% probability a month ago. In addition, investors now see a 16.6% likelihood of a rate cut in 2026, a 30.6% probability of two cuts, and a 29.1% probability of three cuts. Investors anticipate more rate cuts in the second half of the year than in the first half, potentially coinciding with the start of Warsh’s tenure as the new Fed chair in May this year. In fact, futures markets suggest that most investors expect no cuts until June 2026.
  • Finally, given the distortion in CPI data due to the government shutdown, it will probably take another month or two before the data starts providing a clearer picture of underlying price trends. When that happens, investors should be in a better position to judge the true state of the economy

US job growth was deceptively strong in January

• Last week’s US government report on employment was surprisingly positive, at first glance. Job growth was strong in January while the unemployment rate declined. On the other hand, most of the employment growth seen in January was driven by health care; employment declined in several key industries. Moreover, the government revised job data for 2024 and 2025 downward, indicating that employment growth throughout 2025 was much slower than previously believed. Given the ambiguity of the report, it is not surprising that investor reaction was relatively muted. Let’s look at the details:
  • The US government issues an employment report based on two surveys: a survey of households and a survey of establishments. First, let’s consider the establishment survey: In January 2026, 130,000 new jobs were created, including 172,000 new private sector jobs (given government employment declined by 42,000, mostly at the federal level).
  • Employment in health care and social assistance increased by 123,500 workers.  Thus, excluding health care and social assistance, employment was up only 6,500 in January 2026. Job growth in health care and social assistance tends to continue regardless of economic circumstances. Thus, it is job growth in other private sector industries that offers a useful picture of the state of the economy.
  • In January, many industries experienced either a decline in employment or feeble job growth. For example, employment fell by 400 jobs in wholesale trade, increased by 1,200 in retailing, fell by 11,200 in transportation, fell by 12,000 in information technology, and fell by 22,000 in financial services. On the other hand, employment in professional and business services increased by 34,000, while employment in construction was up by 33,000.
  • Meanwhile, the US Department of Labor revised jobs data for both 2024 and 2025—something it does annually and which often leads to substantial changes in our understanding of what happened in the recent past. Over time, more data becomes available, enabling the government to paint a more robust picture of job market trends. Job growth in 2024, previously estimated to be 2 million, was revised down to 1.5 million. For 2025, it was previously estimated to be 584,000, but was revised down to 181,000. This means that, on average, only 15,000 jobs were created each month in 2025. Notably, the economy showed strong growth in the second and third quarters despite slow job growth. This reflected strong labor productivity growth.
  • The establishment survey also includes wage trends data. The government reported that, in January, average hourly earnings of workers were up 3.7% from a year earlier. This was the lowest since July 2024 and the second lowest since May 2021.  Thus, it appears that wage growth is easing even as inflation is modestly accelerating. This means that the growth of real (inflation-adjusted) wages is decelerating. That bodes poorly for consumer spending.
  • The separate survey of households, which includes measurement of self-employment, found that, in January, employment grew faster than the labor force.  As such, the unemployment rate dropped from 4.4% in December to 4.3% in January.

Overall, this report indicates that the 2025 trend of modest job growth continued in January, when the health care and social assistance categories are excluded. What does this mean for Fed deliberations? Recently, the Fed indicated an intention to keep the short-term interest rate steady, especially given persistent above-target inflation and strong economic growth.  However, Fed Chair nominee Kevin Warsh said he wants to cut the benchmark rate because AI is likely to fuel strong productivity growth, which would be disinflationary. Today’s report probably won’t change these viewpoints. Meanwhile, futures markets’ implied probabilities of Fed policy moves didn’t change much as a result of the jobs report.

Japanese election heralds new economic policy path

• Japan is the world’s fourth largest economy (trailing the United States, China, and Germany, when measured in US dollars at current exchange rates). Moreover, Japan plays an outsized role in global financial markets. Thus, what happens in Japan matters to the rest of the world. And something big happened over the weekend. Voters in Japan navigated snow and ice to turn out in large numbers and deliver a massive landslide victory to the Liberal Democratic Party (LDP) led by Sanai Takaichi. She has only been in office for 110 days, and has already transformed Japanese politics. As recently as mid-January, prediction markets indicated just a 50% probability that the LDP would even get a majority in Japan’s lower house. Instead, the LDP won two-thirds of the seats— biggest majority in history—gaining 316 out of a total of 465 seats. In the last election, in 2024, the LDP obtained only about 40% of the seats.

Meanwhile, the LDP has a massive majority, so Takaichi needn’t seek compromises with smaller parties, which is what happened in the recent past. Plus, there is no significant opposition to her within the LDP either. The party owes her their majority while the newer members owe her their seats, which makes them likely to follow her lead, at least for a while. The only likely constraint on her will be the financial markets. If they perceive her fiscal policy to be irresponsible, upward pressure on bond yields could emerge.

What will Prime Minister Takaichi do? Her likely proposals will include a large fiscal stimulus (a concern for the bond market), increased military spending (Japanese defense shares are way up), potential reforms to the country’s pacifist constitution, less immigration, and more government investment in key industries (such as AI and semiconductors).

In addition, Takaichi has talked about addressing the issue of affordability. As such, she has said that, as part of the fiscal stimulus, she wants to temporarily eliminate the 8% consumption tax on food. If only temporary, such a move would not likely have a long-term impact on Japan’s fiscal situation. The problem for investors is the belief that, at the end of the two-year freeze, it will be politically difficult to boost the tax back to 8%.  If so, the long-term fiscal situation could be severely damaged. Bond investors would likely react sharply, as well.

Why does Takaichi want a big fiscal stimulus at a time when government debt as a share of GDP is so much higher than in any other major developed economy? The answer is that she wants to use fiscal stimulus to kickstart the economy. Rather than cut debt through austerity, which often fails, she wants to make the economy grow faster. That will require faster productivity growth, potentially driven by more investment in key industries. Takaichi said that, “we must pull Japan out of excessively tight fiscal policy and a lack of investment,” and added that, “responsible, proactive fiscal policy is at the core of the ... policy transition.”

Before the Japanese election, the yen depreciated and Japanese bond yields rose—both riding on expectations of a potentially disruptive fiscal policy on the part of the new prime minister. There was speculation that Prime Minister Takaichi’s plans for fiscal stimulus could unsettle bond investors, thereby leading bond sales and a move away from yen-based assets.

But nothing of the sort happened. Instead, the yen rose in value significantly since the election and bond yields have fallen. In addition, equity prices have risen sharply. Why?  It appears that investors were pleased at the unambiguous nature of the election result.  We now know with confidence what the government intends to do. And although there might be angst regarding fiscal stimulus at a time of massive debt, the devil is often in the details. Thus, if the government pursues increased investment in key export-oriented industries (as it intends to do), it could boost productivity growth, leading to faster economic growth and, potentially, a better fiscal situation. In addition, if the government makes significant progress in boosting domestic demand, it would help to reduce Japan’s dependence on exports.

European economy shows signs of strength

• The eurozone economy grew at a healthy pace in the last quarter of 2025. Real GDP in the 21-member eurozone was up 0.3% from the previous quarter and up 1.3% from a year earlier. Moreover, growth was due not only to employment growth, but also to modest labor productivity growth. In the fourth quarter, employment was up 0.2% from the previous quarter, and up 0.7% from a year earlier. The difference between the growth of employment and GDP reflects increased labor productivity.

In Germany, Europe’s largest economy, real GDP in the fourth quarter was up only 0.4% from a year earlier. However, it was up 0.3% from the previous quarter, indicating that the German economy is starting to accelerate after not growing in the second and third quarters of 2025. Meanwhile, fourth-quarter year-over-year real GDP growth was 1.1% in France, 0.8% in Italy, 2.6% in Spain, 1.8% in the Netherlands, 1.1% in Belgium, and 1.9% in Portugal. Outside the eurozone but within the European Union, economic growth stood at 3.6% for Poland, 2.4% for Czechia, and 2.9% for Bulgaria. However, Hungary saw only 0.5% growth, year over year.

Europe’s strengthening economy was partly due to strong exports: The European Union reports that, in December, eurozone exports to non-eurozone countries were up 3.4%, when measured in euros. Exports within the eurozone were up by 6.7%. Imports from outside the eurozone were up by 4.2%. For the European Union, exports in December were down by 12.6% to the United States (mainly due to US tariffs), while exports were up by 11.5% to China, by 8.4% to the United Kingdom, by 14.5% to India, and by 20.3% to Switzerland. On the other hand, exports to Japan declined by 2%. Imports were up by 1.6% from the United States and by 10.2% from China.

If not for the decline in trade with the United States, European economic growth would likely have been somewhat faster. Moreover, the decline in China’s trade with the United States led China to seek other markets, including Europe. The strength of European imports from China is a reflection of this. Plus, the low prices of Chinese goods have contributed to a deceleration of inflation levels in the eurozone. Still, European exports to China performed well in December. That, of course, is the goal. The EU Foreign Policy Commissioner said, “If we make ourselves stronger, then our products are also competitive, and we don't need protectionism. Saying that, we also have to deal with the economic coercive practices that come from China and greatly damage our companies—that’s for sure.”

Week of February 9, 2026

• Kevin Warsh and the return of Greenspan-style monetary policy
• Data indicates US job market weakness
• US and India reach a trade deal
• Eurozone inflation eases as the ECB keeps monetary policy steady
• Mario Draghi urges greater economic and political integration in Europe

Kevin Warsh and the return of Greenspan-style monetary policy

• Among economists and investors, there has been considerable discussion about what to expect from Kevin Warsh, who has been nominated by President Trump to replace Fed Chair Powell a few months. What can we reasonably expect and what might it mean for the economy?

Warsh’s most relevant experience was his service as a member of the Federal Reserve Board for five years from 2006 to 2011. During that time, the global financial crisis took place. Perhaps the most notable response of the Fed was to engage in quantitative easing, which is massive purchases of government bonds and other assets. The purpose was to inject liquidity into the financial system at a time when banks were not lending due to a seizing up of credit markets. This policy had been previously proposed by economists as disparate as Milton Friedman and Paul Krugman. Yet it was controversial. Some analysts worried that, by undertaking quantitative easing, the Fed would boost the money supply too rapidly, thereby leading to much higher inflation. This was the view then taken by Warsh. However, quantitative easing did not lead to a big increase in the money supply. Rather, it prevented a contraction in the money supply as happened during the Great Depression. Inflation remained tame.

Today, Warsh continues to be concerned about the size of the Fed’s balance sheet, which was expanded again during the pandemic. In that instance, the money supply did expand rapidly, contributing to a surge in inflation. Although the Fed has recently reduced the balance sheet, it remains historically high as a share of GDP. Warsh has called for the Fed to further reduce the size of its balance sheet through asset sales. The net impact should be to reduce the growth of the money supply, which would be disinflationary. In addition, a sale of government bonds would likely lead to higher bond yields.

Yet Warsh’s view on the Fed’s balance sheet is not necessarily related to inflation concerns. Rather, he believes the Fed should not be a big participant in the market for government bonds as this risks having monetary policy finance government borrowing. He believes that monetary policy should not play a role in fiscal policy. Instead, Warsh has called for a reduction in short-term interest rates because he believes inflation is less of a problem than many investors believe. That is because he expects AI to fuel an acceleration in labor productivity. If that happens, wage increases can be offset by increases in output. Then employers needn’t pass on wage costs to customers in the form of higher prices. As such, productivity gains are generally disinflationary.

Warsh and Treasury Secretary Bessent believe that this moment is similar to what happened in the 1990s when an acceleration in productivity helped to suppress inflation while allowing the economy to grow rapidly. Indeed, at that time, Fed Chair Alan Greenspan chose to keep interest rates low despite a strong economy. This was on the belief that investment in information technology would boost productivity growth, thereby reducing inflationary pressure. In fact, Bessent recently said that “it’s clear that we are at the nascent stages of a productivity boom, not unlike the 1990s.” And this is not simply a view held by the administration. Lisa Cook, the Fed governor, also said that “growing evidence shows that AI has the power to significantly boost productivity.”

If Warsh is confirmed by the Senate (which seems likely), will he succeed in convincing the other 11 members of the policy committee to cut short-term rates and, at the same time, sell government bonds? We cannot know the answer. On one hand, selling of bonds could boost bond yields, potentially weighing on credit market activity and offsetting the impact of lower short-term interest rates. On the other hand, a steeper yield curve could boost the profitability of banks, thereby helping credit market activity. Meanwhile, some investors worry that a rapid effort to shrink the Fed’s balance sheet could create financial market volatility. As such, many expect any such approach to be implemented gradually and with caution.

Data indicates US job market weakness

• In January, corporate America announced a sizeable increase in job dismissals, according to the latest report from Challenger, Gray, & Christmas, an employment services company. Challenger reported that US-based companies announced 108,435 job cuts in January, the highest total since October and the largest January figure since 2009, at the height of the global financial crisis. Challenger commented that there is usually a surge in job cuts in the first quarter of any year, but that this January’s number was unusually high.

Of the 108,435 announced dismissals in January, 46,000 were due to decisions by just two companies: one in transportation and one in technology. In addition, hospitals announced 17,107 layoffs, the highest since the pandemic.

According to Challenger, companies reported that 28,392 dismissals were due to “market and economic conditions.” Another 20,044 were due to “restructuring.” And 12,738 were due to “department closings.” The largest single reason for dismissals was “contract loss.” Yet notably, only 7,624 dismissals were attributed to AI. For all of 2025, 54,836 dismissals were attributed to AI. Finally, in January, only 294 dismissals were attributed to tariffs.

Meanwhile, a separate report found weak job growth in January. ADP, a payroll processing company, releases a monthly estimate of private sector job growth that is often, but not always, a good predictor of the government’s job numbers. For January, ADP reported that 22,000 private sector jobs were created, a relatively weak number.

By industry, ADP reported a loss of 57,000 jobs in professional and business services in January. This was offset, however, by a 74,000 job gain in education and health services. In most other industries, the change in employment was small, with a loss of 8,000 manufacturing jobs and an increase of 9,000 construction jobs. ADP’s chief economist said that “while we've seen a continuous and dramatic slowdown in job creation for the past three years, wage growth has remained stable.” This might be due to weak labor supply growth because of a restrictive immigration policy.

Finally, the number of job openings in the United States fell in December to the lowest level since 2020. The US government’s Job Openings and Labor Turnover Survey (JOLTS) found that, in December, there were 6.5 million job openings in the United States, declining from 6.9 million in November and 7.5 million one year earlier. It was the lowest number since September 2020. The job opening rate (share of available jobs that are unfilled) fell to 3.9% in December, down from 4.2% in November and 4.5% a year earlier. This was the lowest job opening rate since April 2020 at the start of the pandemic, indicating a continued easing in job availability.

US and India reach a trade deal

• Last year the US imposed a 50% tariff on most imports from India with some exceptions because India continued to purchase oil from Russia. Now, however, after Prime Minister Modi pledged to stop purchasing Russian oil, the United States agreed to cut the tariff from 50% to 18%, “effective immediately."

The relationship between India and the United States had seemed favorable early last year, with the two sides agreeing to expand trade significantly during this decade. But that momentum later slowed when Prime Minister Modi refused to publicly state that President Trump had ended the conflict between India and Pakistan. After that, tariffs were imposed. Yet the situation started to change recently after the EU and India signed a major free trade agreement. This followed conclusion last year of a trade deal between the United Kingdom and India. Thus, the time seemed right for the United States and India to reach a deal.

The agreement reached between India and the United States calls for India to cut tariffs on key products to zero. In addition, India pledges to purchase US$500 billion in goods from the United States. It is not clear if this is meant to be over a long period of time or during a single year. In any event, India currently imports about US$50 billion in goods from the United States each year. Thus, reaching the US$500 billion goal would take decades and can only be seen as aspirational rather than a firm plan.

Meanwhile, the deal reached is not a signed agreement. Rather, it is merely a statement on social media with no specifics and no enforcement mechanism. However, if the reduction in tariffs takes place and is not reversed, it will surely be beneficial for the Indian economy. Indeed, the United States is India’s largest export market, accounting for about 20% of Indian exports. As such, it is not surprising that the announcement was followed by a surge in the value of the Indian rupee and the value of Indian equities.

Some of India’s higher-valued exports have already been exempt from the 50% tariff. This includes pharma products and consumer electronics. Thus, the reduction in the tariff will largely have an impact on exports of more labor-intensive products such as textiles and apparel. As such, it will be favorable for employment creation. Moreover, the new 18% tariff will be in line with US tariffs on several countries in Southeast Asia that export textiles and apparel. Given India’s lower labor costs, this new development will put India in a favorable competitive position.

Finally, India’s pledge to stop purchasing Russian oil could be disruptive to the global oil market. It will require that India rapidly shift toward purchases from other countries, potentially including the United States. An analysis by Moody’s said that a full shift away from Russian oil “could also tighten supply elsewhere, raise prices and pass through to higher inflation given that India is one of the world's largest oil importers.”

Eurozone inflation eases as the ECB keeps monetary policy steady

• Inflation in the Eurozone eased in January. This, along with relatively healthy economic growth, has led the European Central Bank (ECB) to keep its benchmark interest rate unchanged for the fifth consecutive month. If the ECB worried that the economy is weakening, it would have cut the rate. If it worried that inflation is accelerating, it might have increased the rate. This decision suggests that they are not worried about either. In any event, let’s look at the details.

Specifically, the European Commission reported that, in January, consumer prices in the Eurozone rose 1.7% from a year earlier and declined 0.5% from the previous month. The 1.7% figure was the lowest since September 2024. When volatile food and energy prices are excluded, core prices rose 2.2% from a year earlier and declined 1.1% from the previous month. The 2.2% figure was the lowest since October 2021.

Very low inflation is often a sign of a weakening economy. That is not the case now. The Eurozone economy has been growing at a modest but healthy pace. Rather, the deceleration of inflation partly reflects the impact of an increase in the value of the euro. That, in turn, puts downward pressure on import prices. In addition, a decline in energy prices contributed to the weakness of headline inflation. On the other hand, prices of services have lately accelerated, likely reflecting the impact of rising wages in a tight labor market.

Annual inflation in January was 2.1% in Germany, 0.4% in France, 1% in Italy, 2.5% in Spain, 2.2% in the Netherlands, 1.4% in Belgium, and 2.8% in Greece.

Meanwhile, the ECB policy committee met recently and chose to leave the benchmark interest rate unchanged for the fifth consecutive month. The benchmark rate is now 2%, down from 4% as recently as mid-2024. The easing of monetary policy from mid-2024 to mid-2025 is likely having a positive impact on economic growth. Usually, monetary policy acts with a lag.

Notably, during the second half of 2025, the US Federal Reserve cut its benchmark rate while the ECB held its rate steady. Normally, this shift in the rate gap would have led to a depreciation of the euro against the US dollar. That, in turn, might have led to concerns about Eurozone inflation. Instead, the euro appreciated as investors reduced holdings of dollar-denominated assets and attempted to diversify their portfolios away from the US dollar. The rise in the euro likely contributed to the easing of inflation in the Eurozone.

Mario Draghi urges greater economic and political integration in Europe

• Three very big economies globally that stand apart in scale and influence: the United States, China, and Europe. Yet unlike the United States and China, Europe is not a cohesive entity. Of course, the European Union, and in particular the Eurozone, represent the continent when it comes to trade negotiations and monetary policy. Yet according to Mario Draghi, former head of the ECB and former prime minister of Italy, this is not enough to enable Europe to compete on a level playing field. As such, Draghi, who previously authored a highly regarded report on how to make Europe more competitive, now says that the EU must do more to consolidate power and become more of a federation. He specifically said that member states need to “avoid being picked off one by one.”

Draghi noted that the EU faces difficulty in making important decisions because all important decisions require unanimity of member countries. He said that such a model does “not produce power.” He also noted that Europe faces new threats that can only be addressed as a group, noting that “we are all in the same position of vulnerability, whether we see it yet or not. The old divisions that paralyzed us have been overtaken by a common threat. But threat alone will not sustain us. What began in fear must continue in hope.”

So, what is Draghi’s solution? According to him, “Where Europe has federated: on trade, on competition, on the single market, on monetary policy, we are respected as a power and negotiate as one. Where we have not: on defense, on industrial policy, on foreign affairs, we are treated as a loose assembly of middle-sized states, to be divided and dealt with accordingly.” He said that a closer federation could “act decisively in all circumstances.”

Draghi’s vision has been discussed before during the long history of European integration since the end of World War Two. As the EU enlarged, it became more difficult to reach consensus. And as the remit of the EU expanded, divisions became more intense. Plus, some countries have resisted further integration for fear of losing sovereignty or fear of being compelled to follow policies on which they are not aligned. The decision by the United Kingdom to exit the EU followed many years of resistance to regulatory mandates stemming from Brussels. Thus, it is likely that Draghi’s vision may not be realized soon. Still, given the perception that Europe is now more alone than in the recent past, anxiety about the current situation could light a fire that stimulates more action on integration.

Week of February 2, 2026

• The Fed leaves rates steady while the president chooses a new Fed chair
• Many countries are attempting to reduce their dependence on the United States
• US trade deals involved commitments to invest in the United States. Will it work?

The Fed leaves rates steady while the president chooses a new Fed chair

• As widely expected, the Federal Reserve’s policy committee left the benchmark interest rate unchanged last week, in the range between 3.5% and 3.75%. The vote was 10 to 2, with two members preferring to cut the benchmark rate by 25 basis points.

Meanwhile, the Fed’s decision came at a time of heightened public attention on the relationship between the Fed and the administration: In this backdrop, Chair Jerome Powell emphasized the importance of policy independence, and said that “it’d be hard to restore the credibility of the institution if people lose their faith that you’re making decisions only on the basis of our assessment of what’s best for everyone.”

Leaving aside the personnel aspects of the Fed, let’s consider the economics: The Fed’s decision was largely based on the view that the economy is stronger than previously expected, which could pose an inflationary risk. Moreover, underlying inflation remains above the Fed’s target. Powell said that “the economy has once again surprised us with its strength—not for the first time.” The committee gave no indication as to when, or even if, it will reduce rates this year.

The Federal Reserve has a mandate to minimize inflation and maximize employment. And although employment growth has been subdued, the Fed has indicated that this is mainly a reflection of immigration policy, which has subdued labor force growth. Meanwhile, productivity is growing rapidly, generating strong economic growth. In this situation, the Fed saw limited need to address slow job growth, especially when the unemployment rate remains low.

Investors were not surprised by the Fed’s decision. Equity prices and bond yields did not move much. However, the dollar rebounded strongly, although that was probably unrelated to the Fed’s decision. Rather, the US dollar had previously fallen sharply when President Trump said he was not concerned with a declining dollar. Later, however, Treasury Secretary Bessent said that “the United States always has a strong dollar policy, but a strong dollar policy means setting the right fundamentals.” This was interpreted to mean that the government is not attempting to reduce the value of the dollar. Hence, the dollar appreciated.

• Two days after the Fed’s decision, President Trump announced that he intends to appoint Kevin Warsh to succeed Jerome Powell as chairman of the Federal Reserve Board. Last year, the administration appointed Stephen Miran to the board for a term that soon expires.

Warsh, like Powell, is an attorney, rather than an economist. His most relevant experience comprised the five years he served on the Federal Reserve Board from 2006 to 2011. At the age of 35, he was appointed by President Bush and served for five years. He was, and remains, the youngest Federal Reserve Board member ever. His tenure coincided with the global financial crisis. The Fed, under Ben Bernanke, cut interest rates dramatically and engaged in quantitative easing (bond purchases) to boost liquidity at a time when banks stopped lending. The policy was a success in that it restored credit market activity, but Warsh was, and remains, a fierce critic of that policy, arguing that it risked significant future inflation.

This suggests that Warsh is an inflation hawk—generally a strong supporter of tight monetary policy even in the face of economic contraction. Yet, today, Warsh has expressed support for a meaningful cut in interest rates, even though inflation remains above the Fed target.

Many countries are attempting to reduce their dependence on the United States

• British Prime Minister Keir Starmer went to China recently. Canadian Prime Minister Mark Carney was there as well. Soon, the leaders of Germany, Finland, and Ireland will also be traveling to Beijing. All of these countries were, until recently, firm allies of the United States, and had often supported US efforts to limit China’s access to advanced technologies and to their own markets. Recently, however, some governments have begun reassessing their economic strategies in light of global trade policy shifts, including new US tariffs and broader uncertainty around long‑standing economic and political alliances.

If the massive US market becomes more constrained or less predictable, then the leaders of these countries would like to find economic access elsewhere. And what better place than China, the world’s second largest economy. Moreover, China has lately eased trade restrictions and encouraged more economic liberalization and integration.

What might this mean for the United States? In a way, the United States could be repeating what China did in the 15th century. At that time, China was the richest nation on earth, having developed the leading technologies of the time and having built an impressive economic infrastructure. Yet, after engaging in pioneering exploration and building trading relations around Asia, the Middle East, and Africa, China turned inward, reducing engagement with the world. In the long run, this led China to fall behind the West and miss the opportunity to benefit from the industrial revolution. Only in the past half century has China reversed its isolation and once again become a global power.

What is the United States doing and how might it affect the long-term role of the country in the global economy? First, it has taken steps to limit certain forms of trade and cross-border economic activity. Plus, the United States has withdrawn from several international organizations and questioned the importance of military alliances. These actions could, over time, reduce the role of the US dollar in the global economy. The dollar has recently declined, hitting a four-year low earlier this week.

Second, the country is cutting back on government funding for some scientific research. Such funding played a major role in fueling innovations that sustained US dominance in multiple industries over the postwar era.

Third, innovation was also fueled by the United States welcoming the world’s best talent. Recent changes in immigration policy may impact its position in science and technology, hence. In recent decades, a large share of innovation and enterprise creation was due to immigrants.

What might a world with lessened US engagement look like? It may take decades before the full implications emerge. And that assumes that the inward turn of the United States is not reversed under a future administration. Often, in US politics, when the pendulum swings too far in one direction, it quickly reverses course. That could happen in the near future regarding trade, migration, and funding for research. In any event, a world in which the United States is less of a dominant political force (even though it will be a major economic force) would be like a return to the 1920s and 1930s, during which, the country was the world’s dominant economy but played only a minor role in geopolitics.

Meanwhile, other countries are not standing still: In Europe, Canada, Singapore, and the United Arab Emirates, among others, there are efforts to attract scientists from the United States. The goal is to boost their ability to develop cutting-edge ideas, industries, products, and companies.

Back to Kier Starmer. As prime minister of the United Kingdom, he leads what was traditionally the closest ally of the United States. There used to be talk of a special relationship. Increasingly, the relationship is viewed as transactional rather than based on emotions or values. Starmer could draw criticism from the United States in going to China, similar to the criticism recently faced by his Canadian counterpart. But Starmer seems to be convinced that the United Kingdom needs a new approach to trade. He took with him several leaders of British companies who are keen to boost their economic relations with China. Plus, if the United Kingdom cannot maintain a special economic relationship with the United States, it will likely seek to restore some of what was lost with the European Union post Brexit. Although it seems unlikely that Britain will rejoin the European Union, a more integrated relationship is a strong possibility.

US trade deals involved commitments to invest in the United States. Will it work?

• In the past year, a pattern appears to have emerged in US trade relations with other countries: First, the administration would impose a steep tariff on imports from a given country. Then negotiations would take place. A deal would be reached in which the US side would typically cut the tariff (although leaving it at a historically high level). In exchange, the other country would agree to boost imports from the United States as well as direct investments in the United States. The latter usually involved a pledge to provide funds that the US government would decide how to invest. Such agreements were reached with the European Union, Japan, South Korea, and Taiwan, among others. 

According to the Peterson Institute, pledges to invest in the United States add up to about US$5 trillion over roughly 10 years—although time frames vary by country. The administration says it is using its leverage to boost investment in the US manufacturing and energy sectors and to end “unbalanced economic relationships.” The question arises as to whether this volume of investment will, in fact, take place; and, if so, what will be its impact.

As to whether it will happen, it is unclear. Many of the announced deals were essentially written lists of terms on which both sides shook hands. There were few formal agreements submitted to legislatures for approval—certainly none to the US Congress. They generally do not include detailed enforcement mechanisms other than the potential to raise tariffs again if the terms are not fulfilled. Also, for market-based economies such as the European Union and Japan, it is not clear how governments can influence private sector actors to boost imports from, and investments in, the United States.

In any event, if there turns out to be a significant increase in inbound direct investment into the United States, there are several potential implications. First, a big increase in investment in the US manufacturing and energy sectors would entail an increase in the demand for labor. Yet, the nation already faces a labor shortage, likely intensified by current immigration policy. Thus, the ability to boost capacity could be hindered or could become expensive.

In addition, due to tariffs, the US manufacturing sector currently faces increased costs that are not shared by foreign competitors. Thus, the ability to compete in global markets could be hampered. As for the energy sector, oil prices are falling, thereby reducing the attractiveness of investing in new capacity. On the other hand, there is a burgeoning shortage of electricity due to massive demand on the part of data centers. Thus, there is a case to be made for more electricity-generating capacity.

Second, a big increase in inbound investment into the United States necessarily implies a big increase in the US trade deficit. Inbound flows of capital increase the demand for dollars, pushing up its value. That, in turn, dampens demand for US exports and increases demand for US imports. The result is a bigger trade deficit. The trade balance and the capital account balance offset one another.

Finally, the terms of several trade deals indicate that the administration will decide how the money is invested. There is a long history of countries in which governments decided on how capital was allocated. At the least, the result was often inefficiency and low returns. Often, capital flowed to players that were less competitive but had political influence. In such cases, investment was largely driven by the need to avert unemployment rather than the need to generate positive returns.