Weekly global economic update

Week of December 15, 2025

• US Federal Reserve acts and offers signals about the future
• Chinese exports continue to grow while tensions rise
• Mexico restricts trade with China

US Federal Reserve acts and offers signals about the future

• As expected, the Federal Reserve cut the benchmark interest rate by 25 basis points—the third such cut this year. Yet nothing else that happened was expected. First, the decision was not unanimous; rather, three of the 12 members of the Federal Open Market Committee (FOMC), which makes policy, dissented. There were two members who wanted to keep the rate unchanged, and one wanting to cut the rate by 50 basis points. There had not been three dissents in six years. Moreover, although the Fed signaled the possibility of another rate cut in 2026, given the president is expected to appoint a new Fed chair in 2026, this is uncertain. It is likely that the new appointee may favor a more rapid easing of monetary policy. Then the question will be whether the new chair can convince the other members of the FOMC to shift policy.

The Fed’s decision to cut the rate to between 3.5% and 3.75% was based on the view that the economy will see stronger grow in 2026 than previously expected and that inflation will be lower. Specifically, FOMC members offered their forecasts for growth and inflation. The median expected economic growth in 2026 stands at 2.3%, up from 1.8% in September. The median forecast for PCE-deflator inflation in 2026 is 2.4%, down from 2.6% in September.  

In his press conference today, Fed Chair Jerome Powell said that “conditions in the labor market appear to be gradually cooling, and inflation remains somewhat elevated.” In other words, there is reason to be concerned about both employment and inflation. Yet, given that inflation is now expected to be a bit lower than previously anticipated, and given concern about job market conditions, the FOMC chose to cut the benchmark rate.  On the other hand, the median forecast is that the Fed will only cut the rate once in 2026, suggesting that the committee remains concerned about inflation. 

In his press conference, Powell noted that consumer spending and business investment continue to grow at a healthy pace. On the other hand, he pointed to weakness in the housing market as concerning. Powell also noted a sharp slowdown in employment growth. He said that “a good part of the slowing likely reflects a decline in the growth of the labor force, due to lower immigration and labor force participation, though labor demand has clearly softened as well. In this less dynamic and somewhat softer labor market, the downside risks to employment appear to have risen in recent months.” 

On inflation, Powell said that the Fed did not have the necessary and up-to-date information due to the government shutdown. Still, available data indicated a largely tariff-driven acceleration in inflation. Yet tariffs mainly influence goods prices while Powell noted a deceleration in services inflation. That, in turn, might reflect the weakening labor market, especially as many services are labor-intensive. 

Powell summarized the situation by saying that “risks to inflation are tilted to the upside and risks to employment to the downside—a challenging situation. There is no risk-free path for policy as we navigate this tension between our employment and inflation goals. A reasonable base case is that the effects of tariffs on inflation will be relatively short-lived—effectively a one-time shift in the price level. Our obligation is to make sure that a one-time increase in the price level does not become an ongoing inflation problem. But with downside risks to employment having risen in recent months, the balance of risks has shifted.” 

Going forward, the Fed indicated that future decisions will depend on data. Perhaps the data of most interest will be the degree to which companies pass on the cost of tariffs to their customers. If they pass on the lion’s share of their increased costs, then inflation will rise significantly. If so, it will justify the Fed’s inclination to keep rates stable. On the other hand, a new chair will likely take a different view, given what we know about the US administration’s views on monetary policy. Historically, the FOMC has given considerable deference to the views of the chair. Yet if a new chair takes a radically different view, there could wind up being more division within the Fed. That, in turn, would create more uncertainty for investors trying to infer the future trajectory of policy. 

Aside from cutting the benchmark interest rate, there are some other interesting aspects of Fed policy and organization worth noting:

• First, in addition to the interest rate cut, the Fed announced that it will engage in US$40 billion in monthly purchases of short-term Treasury bonds. Previously, the Fed had been selling assets as part of an effort to reduce the size of its balance sheet. This quantitative tightening, as it came to be known, was effectively a tightening of monetary policy. Now that the Fed has shifted to easing policy, it made no sense to sell assets. The end of asset sales had been anticipated.

However, the large size of the asset purchases on which the Fed is now embarking was surprising to some observers. Still, Chair Powell said that this decision is not part of the monetary policy mix. Rather, it is meant to stabilize the country’s financial plumbing, especially given recent volatility in short-term funding markets.  It will also help the Treasury to fund its massive sale of bonds to cover the budget deficit.

• Second, although three members of the 12-member Federal Open Market Committee dissented on the decision to cut the benchmark interest rate by 25 basis points, there were four nonvoting regional Fed bank presidents who voted to keep rates unchanged. The FOMC comprises seven members of the Federal Reserve Board and five of the 12 regional Federal Reserve Bank presidents. The five always include the New York Fed president and four rotating presidents. The eight regional Fed presidents currently not serving on the FOMC can still express their views. And, in this case, four of them said no to an interest rate cut. This is significant because, over a short period of time, these presidents will return to the committee. It suggests the possibility of greater division among Fed policymakers going forward—especially if the president appoints a Fed chair next year who favors rapid easing of monetary policy.

Meanwhile, the US administration has indicated a preference for reducing the power of the regional Fed bank presidents. Yet, despite that, the seven-member board voted unanimously to approve the reappointment of 11 of the regional Fed bank presidents, with new terms beginning in March 2026. The regional Fed bank presidents are appointed by the commercial banks that are members of the Fed. The decision to approve the reappointment appears to reinforce the Fed’s independence but has likely set the stage for more division in the year to come. 

Finally, in his press conference after the Fed’s announcement, Chair Powell said that the professional staff at the Fed believes that the government’s employment numbers are likely overstated. That is, the official numbers indicate faster employment growth than is actually taking place. Specifically, Powell said that, although the official data indicates recent average job growth of 40,000 jobs per month, the true number could be a loss of 20,000 jobs per month. 

The reason for the difference has to do with the method used by the US Bureau of Labor Statistics (BLS). Given its lack of visibility regarding the creation or destruction of businesses, it guesses the number of jobs created or destroyed, based on a statistical model that often overestimates job creation, thereby leading to periodic downward revisions. The BLS plans to change the method in February, which could lead to more accurate numbers. 

The significance of Powell’s remarks is that, if the Fed believes that job growth has been far worse than reported, it makes sense for the Fed to ease monetary policy.

Chinese exports continue to grow while tensions rise

• China’s exports rebounded in November while exports to the United States continued to decline sharply in the face of tariffs. Meanwhile, China’s trade surplus surged to over US$1 trillion. Other countries are complaining about China’s trade surplus, mainly because their industries feel threatened by intense competition from China’s increasingly competitive exports. Yet the Chinese trade surplus principally reflects China’s excess savings, which is funneled into foreign investment. Let’s look at the details:

In November, China’s exports (denominated in US dollars) were up 5.9% from a year earlier, hitting the highest level in eleven months. Exports were up 4.3% to Japan, up 12.8% to Taiwan, up 35.8% to Australia, up 14.8% to the European Union, and up 8.2% to ASEAN (Southeast Asia). Meanwhile, exports to the United States were down 28.6% from a year earlier. Although the United States and China have reached a temporary agreement on trade, the deal leaves in place very high US tariffs on imports from China. 

China’s trade with Southeast Asia has been expanding for several years and continued to grow rapidly in 2025. For example, Chinese exports to the six largest economies in Southeast Asia were up 23.5% in the first nine months of 2025 versus a year earlier.  Ever since the United States raised tariffs on China during the first Trump administration, there has been a shift in exports away from the United States and toward Southeast Asia. This has often involved sending components to Southeast Asia to be assembled into final goods for export to the United States. This year that process accelerated, as the United States imposed steeper tariffs on Chinese imports. The United States, however, has warned against transshipment of goods from China through Southeast Asia to the United States. It has threatened steeper tariffs on goods deemed to have been transshipped. Moreover, this year, the United States imposed steep tariffs on Southeast Asian countries as well. Still, US imports from Vietnam, for example, were up 28% from December to August.

Also, China’s strong exports to the European Union have drawn criticism from some European leaders concerned about China’s ability to compete vigorously in such categories as automobiles and capital goods. This comes as Europe faces a trade war with the United States that involves a significant increase in US tariffs on European goods. Germany, which used to have a trade surplus with China in capital goods, now has a deficit as China has boosted its competitiveness in this area. In November, Chinese automobile exports were up 16.7% from a year earlier. The result is growing support in Europe for restrictions on Chinese imports.

Meanwhile, China’s imports grew modestly in November, up 1.9% from a year earlier.  Imports from the United States were down 13.2%, likely because of declining imports of inputs needed to produce exports to the country. At the same time, imports were down modestly from ASEAN and the European Union. Commodity imports were down sharply while imports of more advanced products were up strongly. For example, coal imports were down 33.5% in November from a year earlier while refined oil imports were down 19.3%; natural gas imports were down 14.3%. In part, this reflected lower prices. On the other hand, imports of automatic data equipment were up 18.2% while imports of high-tech products were up 8.8%. The latter two categories contributed to China’s growing production of high-tech products.

The rising Chinese trade surplus—which has generated criticism by many of China’s trading partners—largely reflects increasing Chinese investment overseas. Essentially, China is a high-saving country, saving more than it invests and sending the surplus overseas. The trade surplus is the counterpart to this overseas investment. That is, when China exports more than it imports, it accumulates foreign currency that can only be invested overseas. If China reduced its savings, it would import more and have a lower trade surplus. The result would be less net investment overseas.

The Chinese government is evidently aware of this process and is likely concerned about foreign governments potentially imposing restrictions on Chinese trade. As such, China’s president recently said that “it is essential to adhere to domestic demand as the main driver, building a strong domestic market.” Among the ways to make this happen are appreciation of the renminbi, which would reduce the cost of imports, fiscal support for households, and structural reforms meant to encourage more spending and less saving.  For example, improving the social safety net could have this effect. China has taken some steps in this direction. At the same time, it continues to promote exports of high value–added goods, in which Chinese competitiveness is growing. This includes information technology and clean-energy products.

Mexico restricts trade with China

• Mexico is keen to maintain a friendly economic relationship with the United States, especially as negotiations to renew the free-trade agreement between the two countries begin. As such, it is working hard to avoid the possibility of Chinese goods being transshipped from China to the United States through Mexico. Thus, Mexico has announced tariffs of up to 50% on imports of Chinese automobiles and other goods.  Moreover, to avoid the appearance that China is being singled out, Mexico also implemented tariffs on imports from other countries with which Mexico does not have a trade agreement. In all, imports of 1,400 products will face higher tariffs. 

Mexico is the biggest trading partner of the United States. But Mexico has also had a growing relationship with China, with Chinese imports hitting US$130 billion last year—up 75% since 2020. China is now Mexico’s second largest trading partner. In fact, in the first half of 2025, Mexico was the biggest purchaser of automobiles exported from China.  

Now, with steeper tariffs, it is likely that Mexican exports to China may decline significantly. Mexican consumers are expected to face higher prices for cars, some appliances, and other goods. Yet Mexico evidently wants to demonstrate to the United States that it is trying to avoid transshipment. Still, by including tariffs on other trading partners for whom there have been no complaints about unfair trade practices (such as South Korea and Brazil), Mexico may risk undermining trading relations with those countries.

Under the terms of the United States–Mexico–Canada (USMCA) agreement—the free-trade agreement between the three countries that succeeded NAFTA, negotiated by the first Trump administration—the deal will be reviewed in 2026 and could wind up significantly different. Mexico hopes to mostly retain free access to the US market but might worry that the United States may seek to reduce the trading relationship. Currently, about 90% of Mexican exports to the United States are tariff-free. Yet goods not covered by the USMCA are now subject to a 25% tariff. Meanwhile, there has been talk about the United States ditching the USMCA and negotiating separate bilateral trade deals with Mexico and Canada.

Not surprisingly, China is not pleased with Mexico’s actions. The government urged Mexico to “correct its erroneous practices of unilateralism and protectionism as soon as possible.” In addition, the Chinese government said that Mexico is “under coercion to constrain China.” Regardless, it looks like this year’s major shift in US trade policy is already having a spillover impact on other countries’ trading policies.

Week of December 8, 2025

• Some comments on the ‘safe haven’ role of the US dollar
• Potential global impact of Japanese monetary policy
• More signs of US job market weakness
• The fiscal impact of US tariffs
• Eurozone inflation accelerates slightly

Some comments on the ‘safe haven’ role of the US dollar

• In early April, there was a narrative from some economists and investors around a “capital flight” from the United States, following the US administration’s announcement of steep tariffs.  Immediately after the announcement, US bond yields increased while the value of the US dollar declined. Normally, a relative rise in US bond yields would have pushed up the value of the dollar.  Instead, there was investor concern about the sharp shift of US trade policy toward tariffs, the uncertainty about the future of the policy, and concerns about the trajectory of US fiscal policy.  Many investors became wary of holding assets denominated in US dollars and started to shift toward other assets such as the Japanese yen, the Swiss franc, and gold.

However, in the months that followed the April tariff announcement, investors returned to dollar-based assets, largely because of the attractiveness of US equities and expectations of further easing of US monetary policy. As a result, bond yields declined from their peak, while the value of the US dollar rebounded slightly. This mostly reflected enthusiasm regarding investment in artificial intelligence. Still, many foreign investors in US equities reportedly engaged in hedging strategies to manage currency risk.

On the other hand, a new report from the Bank for International Settlements (BIS)—the banker to the world’s central banks—suggests that the traditional safe-asset role of the US dollar has diminished compared to other favorable assets. The BIS noted that “historically, as safe-haven assets, US Treasuries tended to exhibit positive correlations with other safe assets—for example, bonds issued by highly rated sovereigns or gold—as well as with gauges of uncertainty and risk appetite such as the VIX [volatility index]. However, these correlations have approached zero since April, possibly indicating a weakening of US Treasuries’ safe-haven properties. By contrast, the prices in other core bond markets have not been subject to similar shifts.”

If this analysis is correct, it bodes poorly for the US government’s ability to issue large amounts of debt with impunity. Until now, investors tended to dismiss concerns about the burgeoning debt of the US government, confident that the safe-haven properties of US Treasuries would offset the impact of excessive debt. That might no longer be the case. Going forward, US bond yields could rise sharply if fiscal concerns intensify.

Still, use of the US dollar in international transactions is now higher than during the past quarter-century, accounting for almost half of all transactions. And despite the increased role of the Chinese renminbi, it still only accounts for 3.2% of all transactions. Thus, while investor preferences may be shifting, the US dollar’s central position in global transactions does not appear to be under threat.

Potential global impact of Japanese monetary policy

• As investors await a decision from the Bank of Japan (BOJ) to raise the benchmark interest rate, they are concerned that the yen-carry trade could shut down, thereby disrupting global financial markets.  The BOJ has already indicated a likelihood of raising the benchmark interest rate, given concerns about persistent inflation. Futures markets are now pricing a two-thirds probability that the BOJ will raise the rate at its next policy committee meeting later this month.

For a very long time, the benchmark interest rate was very low, even negative for a while. This fact encouraged investors to borrow cheaply in yen and purchase high-yielding assets in other currencies.  This was known as the yen-carry trade. It was very profitable, so long as the value of the yen did not rise sharply—and it didn’t.

Yet now, in anticipation of higher short-term rates, Japanese bond yields have risen sharply, offering investors better returns on yen-denominated assets. This, in turn, has contributed to higher bond yields in the United States and Germany as Japanese demand for foreign bonds has diminished. As such, a further tightening of Japanese monetary policy could have global implications.

Of particular concern would be emerging market (EM) assets. The yen-carry trade partly involved investors borrowing in yen to purchase EM assets. This, in turn, put downward pressure on EM bond yields. If the carry trade shuts down or diminishes, EM governments could face higher borrowing costs.

More signs of US job market weakness

• Because of the recent US government shutdown, the next official report on labor market conditions due in November will not be published until Dec. 16, 2025, after the Federal Reserve’s policy committee meets to set interest rates. Thus, Fed leadership will have to rely on other pieces of information to assess the state of the job market. One such piece is the estimate of private sector employment published by ADP, a payroll-processing company. The ADP report is often, but not always, a good predictor of official numbers.

Last week, ADP released its estimate for November. It said that the number of private sector jobs fell by 32,000 from October to November—the biggest decline since March 2023. Moreover, ADP estimates that private sector employment fell in four of the last six months. This report led investors to boost their expectations of a rate cut from the Fed this month. For futures markets, the implied probability of a rate cut in December increased from 88% on the day the data was published to 89% the day after. As such, the yield on the government’s two-year bond fell.

The chief economist at ADP commented that “Hiring has been choppy of late as employers weather cautious consumers and an uncertain macroeconomic environment. And while November’s slowdown was broad-based, it was led by a pullback among small businesses.” Indeed, numbers show that, in November, employment fell sharply for establishments with fewer than 50 employees. This was partly offset by strong growth in establishments with 50 or more employees.

Meanwhile, ADP estimated that employment fell sharply in manufacturing, information, and professional and business services. On the other hand, employment grew at a healthy pace in education and health services as well as in leisure and hospitality. This is similar to the pattern seen in the government’s jobs report for October.

Overall, this report is consistent with the view that the US job market has softened. Yet it is unclear if that is only due to weak demand. Rather, the shift in immigration policy has slowed labor force growth. Consequently, it is likely that the job growth slowdown partly reflects both weakening supply and demand in the labor market. Unless there is an offsetting acceleration in labor productivity, slower employment growth will result in slower economic growth.

The fiscal impact of US tariffs

• How much revenue has the US government collected since tariffs were substantially increased? And how does the revenue compare with the value of imports? These are important questions and, thankfully, we have answers from a Peterson Institute analysis.

First, the analysis says that the US government generated US$149 billion in tariff revenue from January through August of this year—a significant increase from the previous year when tariffs rates were very low. In the same period, the federal government’s budget deficit was US$1,865 billion.  This means that tariffs had only a modest impact on the budget deficit.

At a recent meeting in Paris on the sidelines of the OECD’s annual meeting, I heard the administration’s interim chairman of the Council of Economic Advisors, Pierre Yared, state that tariff revenue is reducing the budget deficit, thereby removing any concern about the fiscal effects of the One Big Beautiful Bill. Yet, if tariffs lead to a further reduction in imports, revenue will decline, reducing the fiscal impact. The administration has also suggested that tariffs can lead to reshoring of manufacturing, which implies a reduction in imports of manufactured goods. That, in turn, suggests a decline in tariff revenue.

Meanwhile, the Peterson Institute also states that tariff revenue is about 10.2% of the value of imported goods. This is lower than the 17% tariff rate estimated by the Yale Budget Lab. But the Peterson Institutes also accounts for exemptions, exclusions, delays, and other offsets. Still, this effective tariff rate is historically high. Moreover, it is having variable effects depending on the country from which imports arrive, and the types of products imported.

The report says that, in August, tariff revenue was 16% of the value of imported consumer goods.  The figure was 11.5% for industrial intermediate goods, 6.7% for capital goods, and 1.3% for raw materials. However, the report notes that, in August, most companies had not yet passed on most of the cost of tariffs to their customers. Thus, the impact on consumer prices was modest. In part, this is because companies are not marking up old inventory. However, it is likely that there will be greater passing through of costs in the months to come, thereby leading to higher inflation.

Also, the report found that the effective tariff rate in August was 37.1% for imports from China, 16.4% for Japan, 9.2% for the European Union, 4.7% for Mexico, and 3.7% for Canada. The very high tariff on Chinese imports is already leading to a substantial diversion of trade away from China.  The low rates for Mexico and Canada reflect the exemption for goods covered by the free trade agreement between the United States, Mexico, and Canada, which will be renegotiated in 2026.

Eurozone inflation accelerates slightly

• Inflation in the Eurozone accelerated slightly in November, although it remains low and close to the target of the European Central Bank (ECB). The European Union reports that, in November, consumer prices in the Eurozone were up 2.2% from a year earlier. This is up from 2.1% in October.  On the other hand, the European Union reports that prices fell 0.3% from October to November.

When volatile food and energy prices are excluded, core prices were up 2.4% in November from a year earlier. This was the same as in September and October. However, core prices fell 0.5% from October to November, suggesting that inflation is starting to weaken.

Most notable was the acceleration in services inflation. In November, the price of services was up 3.5% from a year earlier—the highest since April 2025. However, service prices were down 0.8% from October to November. Services inflation is important because services represent the largest share of consumer spending. Moreover, services tend to be labor-intensive and are sensitive to labor market conditions.

The fact that annual services inflation accelerated in November will likely be of concern to the European Central Bank (ECB). The ECB policy committee will meet on Dec. 18, 2025. ECB President Lagarde recently stated that the rates “we settled on at the last meetings are, in my view, set correctly.” Meanwhile, futures markets signaled a probability of 30% for a rate cut by June; in other words, investors believe that the ECB likely has no reason to ease policy further, especially if inflationary pressures remain.

By country, inflation in November was 2.6% in Germany, 0.8% in France, 1.1% in Italy, 3.1% in Spain, 2.6% in the Netherlands, and 2.6% in Belgium.