Thought of the Week
It’s the 1980s. The Police, Michael Jackson, and Van Halen are chart toppers; the Washington Redskins were an NFC powerhouse; and Ronald Reagan was president. Not only had I never taken an economics or finance course, but the freshman lecture hall I was walking into seemed as big as the auditorium and stage at my high school. The rumor around campus was A with Shay, and D with Dunn. Economics 101 was a prerequisite for a business major, and I was about to get my first lesson in macroeconomics from Dr. Dunn. We hit all the basics—guns and butter, supply and demand, and the Production Possibilities Frontier. It was in that classroom at the corner of Washington, D.C.’s 23rd and F streets where we learned that tariffs generally cause one-time increases in price levels, making things cost more now, but infrequently lead to sustained rises in the rate of inflation. While they could cause demand shocks, lowering inflation and leading to higher unemployment short-term, most often, they eventually led to one-time price level increases as businesses adjusted to higher costs. How do those early lessons explain what we’re seeing today? The answer: well, it’s a bit complicated, but not bad. Although many prominent economists forecasted a return of economy-wide inflation and widespread layoffs when President Trump first imposed sweeping tariffs on “Liberation Day,” the Federal Reserve Bank of San Francisco says it should come as no surprise that the highest tariffs in nearly a century haven’t caused the massive surge in inflation that many economists feared. Analyzing data from 1886 to 2017, they found that tariff increases typically didn’t lead to higher inflation; instead, they slowed down price growth, with a “one-percentage-point tariff increase” associated with a “0.6-percentage-point drop in inflation.” Separate economic studies, by Northwestern University and others, found that inflation did rise following tariff hikes, but only marginally, because higher import costs were offset by falling demand as imports and exports dropped and manufacturing activity contracted. The San Francisco Fed and the university studies do acknowledge in their notes sections that tariffs hurt the economy by creating uncertainty, a word we’ve heard continuously since April 2025. So, what does this economics lesson have to do with lobbying? Know your audience and serve as an information source. Rather than walk into a congressperson’s office and try to convince them to make the case to the administration for a special reprieve from a specific tariff, which would never work, especially with a newly elected president who enjoyed 90%+ approval ratings from members of his own party, this was the time to explain how the uncertainty created by the tariffs would impact hiring and investment decisions in their district. For the record, in multiple presentations, since the tariffs were imposed, I’ve predicted a “stagflation-light” scenario—inflation remaining above the Fed’s target rate of 2% and a softer labor market than would be expected with present rates of GDP growth. That A I received from Dr. Dunn is safe.
Thought Leadership from our Consultants, Think Tanks, and Trade Associations
Bloomberg Government Recognizes the World Bank’s Improved Economic Outlook. The World Bank raised its forecast for growth this year, saying the global economy has proved surprisingly shock-proof in the face of an “historic” escalation in trade tensions. Real gross domestic product is now projected to rise by 2.6% in 2026, up from a June forecast of 2.3%. The U.S. economy saw a sizable boost to an estimated 2.2% gain this year, compared with just 1.6% previously. The new 2026 global forecasts mark a modest slowdown from stronger growth in 2025 than the lender had anticipated. A burst in trade as companies and households rushed to get goods in anticipation of President Trump’s tariffs, combined with a smaller impact from the high import levies and a push in intelligence spending, helped bolster world growth to an estimated 2.7% last year. The Bank is following the International Monetary Fund (IMF) in marking up its estimates for 2025. The IMF boosted its own projections in October, while warning about strains ahead. The Fund is scheduled to provide fresh forecasts next week. In its report, the World Bank said the global economy’s resilience has been “notable,” but risks remain tilted to the downside, particularly trade tensions, which could re-escalate, especially as higher tariffs could redirect exports to third countries, leading domestic producers in those countries to seek protection from increased import competition.
Capstone Says 25% Tariffs on All Iranian Trade Partners Unlikely to Materialize, Despite White House Threats. This week, President Trump stated on Truth Social that all countries doing business with Iran will pay a 25% tariff effective immediately. Although no details on tariff implementation were given, among the largest Iranian trading partners are China, the United Arab Emirates (UAE), Turkey, and Iraq. It is believed that the tariff threat is largely symbolic and is unlikely to materialize into tariffs on countries such as China and the UAE; however, President Trump may be more willing to impose tariffs on countries such as Iraq. The Trump administration has taken a similar approach in the past; consider that they only imposed tariffs on India, despite China also being a major buyer of Russian oil. Following the one-year trade truce reached in October 2025, the White House will be reluctant to impose new tariffs on China. If the U.S. were to impose additional tariffs on Chinese imports, Beijing would likely perceive that as a breach of the trade agreement, which could result in reduced access to critical minerals or canceled purchases of U.S. soybeans. President Trump is likely to avoid any unneeded confrontation before his planned visit to Beijing in April. However, the administration does have the ability to impose tariffs almost instantaneously should they choose to follow through on the threat. For the moment, the International Emergency Economic Powers Act (IEEPA) remains an eligible tool to impose 25% tariffs on trading partners, despite ongoing litigation. Alternatively, President Trump could use Section 338 of the U.S. Tariff Act of 1930, although the statue has never been used to impose tariffs.
Observatory Group Believes There’s a Method to Trump’s Greenland Madness. This week, the Trump administration began negotiations with Denmark and Greenland (as well as some EU and NATO members) to alter the status quo of Greenland. The base case is that the island’s standing will be different a year from now, if not sooner, although this does not mean the U.S. will obtain full “ownership,” which is President Trump’s maximalist opening position. Because other issues are competing for the administration’s attention—Iran, Venezuela, Cuba, and the April Trump/Xi meeting—the White House would like to declare a “win” before the summer ice melt opens Arctic shipping lanes and the U.S. shifts to election mode. The base case does not include a U.S. military occupation as there are domestic impediments to that, even more important than international considerations, including the need to keep American military bases around the world. There is also the risk of breaking up NATO and the broader Western alliance, which is consistently helpful to the U.S. with other security risks, including terrorism, the Middle East, China, and Russia. Instead, President Trump has started with a maximalist position as a bargaining strategy with the minimum expected to be an amended Defense of Greenland Treaty between the U.S. and Denmark, or a security treaty with Greenland directly, in the case of independence. Although Denmark, Greenland, the EU, and other NATO members do not want to accept such demands today, the EU and its member states were also seen as unlikely to accept President Trump’s tariffs or to take on fully funding the war in Ukraine from the U.S.—until they did. There are many ways the White House can increase pressure to force an agreement on a new treaty, particularly one that falls short of “ownership.” In fact, there are some in Denmark who want to change the island’s status. Not just to mollify President Trump and ensure short-term cooperation while Europe builds out its own militaries, but also to ensure that a vulnerable part of the world is no longer their responsibility. The White House will probably take unilateral action if summer is approaching and the Danes have refused to countenance any treaty renegotiation and/or there is no further movement on independence. Action will be short of military occupation, but could include things like tariffs, embargoes, sanctions, bans on military hardware sales, the refusal to update American software, etc. Absent a more pressing geopolitical challenge, President Trump’s interest in Greenland will not fade until he can declare some sort of “win.”
“Inside Baseball”
Steady Labor Market May Allow Fed Pause. According to the Conference Board, the steady state of the labor market reflected in the latest employment report will likely keep the Fed on hold at its upcoming meeting later this month. The decline in the unemployment rate in December, following a downward revision in November, suggests that downside risks to the state of the labor market may have been somewhat exaggerated. The latest Job Openings and Labor Turnover Survey (JOLTS) for November continued to support the view of a relatively healthy low-churn labor market as job openings remained low, but so did layoffs. The Fed may pause in January to assess how previous interest rate reductions percolate throughout the economy. However, the FOMC is expected to resume rate cuts later this year.
In Other Words
“My own morality. My own mind. It’s the only thing that can stop me,” President Trump when asked about the limits of his authority in global affairs.
Did You Know
President Trump’s State of the Union (SOTU) address is scheduled for February 24, 2026. No doubt, President Washington’s first State of the Union address, delivered in January 1790, will remain the shortest on record, coming in at just 1089 words.
Graph of the Week
Data Indicates Underlying Inflation Rose Less Than Expected in December. The core consumer price index, which excludes food and energy categories, increased 0.2% from November, according to the Bureau of Labor Statistics. On an annual basis, it advanced 2.6%, matching a four-year low. While the impact of last year’s government shutdown on the data hasn’t fully unwound, the key positive in this report is flat core goods prices, reinforcing the view that tariff pass‑throughs to consumers have been much milder than anticipated.
