In the weeks following the Trump Administration’s “Liberation Day,” sweeping tariffs and erratic policymaking coupled with the threat of mass government layoffs have thrown U.S. and global markets into disarray. The U.S. dollar, too, is losing its safe-haven status as confidence in the future of U.S. growth and stability continues to unravel.
To make sense of these sweeping changes, Columbia Business School’s Jerome A. Chazen Institute for Global Business hosted a conversation between Abby Joseph Cohen, Professor of Economics and retired partner at Goldman Sachs, and Brett House, Professor of Professional Practice and former deputy chief economist at Scotiabank. Together, they unpacked the drivers behind the current market dysfunction, from self-imposed inflationary pressure to weakening institutional trust and a politicized public service.
“The trade policy in place right now is the worst I have ever seen in my career,” said Cohen.
Their discussion also highlighted what sectors could remain resilient, what to watch for next, and how investors and professionals can position themselves as economic uncertainty deepens. Below is an abridged version of House’s and Cohen’s conversation.
Brett House: Why have the markets been disrupted so much by the tariffs, the uncertainty, and the erratic policymaking over the last few weeks?
Abby Joseph Cohen: The question in some ways answers itself. We have seen policy not just with regard to trade, but a number of other related areas that simply have been incredibly erratic, and markets don't like things that are erratic, whether a policy is good or bad or indifferent.
Decision makers – consumers, business leaders, and other governments – like to see some sort of consistency so they will have a plan. And this erratic nature just over the last three weeks has basically torn all of that apart, number one. Number two, something that's not been getting a lot of attention here is that there are meetings taking place this week in Washington, organized by the World Bank and the IMF. As an indication of the level of nervousness and uncertainty, there are rumors that the United States may withdraw from these institutions just the way the Trump administration withdrew us from the World Health Organization and from a number of other international organizations. I don’t expect this to occur.
Now, just think about it: these multilateral institutions were largely conceived and created by the United States after the Second World War. The United States took advantage of its strong position as an economy that was not damaged by the Second World War, as a nation that didn't have the sort of damage and population losses that had been seen throughout Europe and in parts of Asia. The idea was to rebuild the global economy in a manner benefitting the US and the rest of the world. And to create multilateral institutions that would help direct future growth. The U.S. was extraordinarily generous through things like the Marshall Plan and other forms of finance and support that were provided for many years.
The Trump administration has basically torn up the sense of how the United States positions itself in the world. These dramatic reactions are not just to the tariff policy, it's concern about how the United States views itself and how others view the U.S. Although there's often discussion about the market — the stock market down now 19% — I'm more concerned about the dollar being down approximately 12%. I'm concerned that bond prices are down. Normally, the stock market and bond market — we hope — are moving in opposite directions. That's the whole point of the balanced 60-40 portfolio. That's not what’s happening. We're seeing investors around the world, including in the United States, stepping away from U.S.- based assets and that's a worrisome thing.
House: We are seeing unusual developments in markets right now, as you noted. Typically when equities are down, bonds provide a hedge against them and the U.S. dollar is a safe haven when we see volatility in markets. In this case U.S., equities are down, bonds are being sold off, and the U.S. dollar is down. What are markets telling us?
Cohen: Markets are telling us that they have very little confidence in the policies undertaken by this administration. Keep in mind that on January 19th, the U.S. economy was viewed as the strongest and most robust in the world. Economic growth in the fourth quarter was about 3%. Core inflation was just about 2 1/2%. The unemployment rate was at an extremely low level, job creation was robust, and corporate profits were at record levels, not just in terms of dollars but in terms of return on equity and ROIC.
Now, just a few weeks later we have seen a reversal in expectations. On January 19th, if you go back and look at some of the macro forecasts, the assumption that there would be a recession in the United States, depending upon the forecast, was between zero and 15%. That number is well above 50% now, and there are a number of established forecasters who put it at 65% or higher. That's an awful lot of damage in confidence in a very short period of time. For discussion purposes, let's set aside the erratic nature of the administration’s policy making and focus on the policy itself.
The trade policy in place right now is the worst I have ever seen in my career. And let's clarify something – the media would have you believe that because the White House reversed its stance on those so-called reciprocal tariffs, everything is back to where they were. This is not the case, because what is in place is still a new 10% universal tariff. And the tariff on China is 135% or 145%. The simplistic comments like ‘oh, it's only a 10% tariff and we had a 2.5% tariff on average, and so it's only gone up four times.’ No, that’s not true. The average tariff now is about 20% if you weight the countries from which we import and the tariff rate which has been applied to imports coming from them.
So we're now talking about tariffs that will be paid ultimately by American consumers of 18% to 20%. This is a huge tax increase that will fall very heavily on middle-income Americans. And to me this represents an absolute mistake. Not only will it slow down economic growth, it will also boost inflation and be very problematic. This results in the dilemma being faced by the Federal Reserve. Do they keep interest rates high to offset this self-imposed inflationary consequences or do they lower interest rates to offset a self-imposed slowdown in economic growth? I would say that this war of words that Mr. Trump is having, basically with himself, with regard to what Mr. Powell is doing suggests that the Trump team is finding a scapegoat ahead of time for what I believe will be a bad economic outcome.
House: Chair Powell himself recently referred to this as a challenging position. What are the particular challenges of this position and how can he reconcile them or mitigate them?
Cohen: I started my career at the Federal Reserve Board in Washington. And although I was a junior person, like many others I have been an avid Fed watcher for many years. And I would say that Jerome Powell has been very, very careful in all of his public statements. He has said nothing that would inflame most presidents, but I believe that Mr. Trump, as I mentioned before, is looking to identify a scapegoat. So whatever Mr. Powell says, Mr. Trump is going to find something to object to, number one.
Number two, Mr. Powell is not the only one who sets policy, right? The entire [Federal Open Market Committee] has several voting members and there seems to be, based upon their public commentary, unanimity in terms of their approach. The thing that has surprised me over the last week or two is a number of the Fed presidents and other voting members have made public statements that have been very consistent with Mr. Powell. So he is not alone and I think that they're all feeling this incredible challenge.
In the past, we would call this challenge stagflation, that is stagnation of the economy where it's not growing the way you'd like, plus inflation. What is different about this go round is that this is mainly self-inflicted. This is a function of new trade policies that have been imposed upon the economy. The prior stagflationary period, which occurred 30 years ago, was related to the sharp increase in commodity prices. OPEC imposed a boycott, there were rises in energy and other commodity prices. And so there was an underlying global inflation that the Federal Reserve needed to respond to. The current situation is a very specific case: the U.S. government has effectively imposed an 18 to 20% sales tax on the economy.
House: Given that that has been proposed, and we've seen in the Michigan survey a huge increase in inflation expectations, on the tools that the Fed has, do you think that makes it probably unlikely now that they could cut the policy rates when that big increase in inflation expectations has essentially pushed real rates down so much?
Cohen: I think the Federal Reserve has an enormous problem and, quite frankly, it looks like a no-win situation for the Fed’s policymakers. The Fed normally looks at existing levels of inflation but, as Brett points out, they also look at expectations, because during an inflationary period the goal is to control not just current inflation, but also long-term expectations. These long term expectations really drive inflation and interest rates.
What do I mean by that? If everybody thinks that the price of some good is going to go up in a month or two or three, people run out and buy that. So it basically is a self-fulfilling prophecy in terms of what happens with inflation. And the thing that is so troubling and disappointing is that inflation expectations were quite low just a few months ago. Even though people were concerned about the price of eggs—driven by avian flu, not policy mistakes—those long-term inflation expectations a few months ago were quite low.
Now we have a situation where even before inflation has begun to kick up in response to tariffs, we see that the inflation expectations have moved higher. But something I'm even more concerned about is what happens to middle income workers when they realize that not only is inflation up, their job prospects may be down. Why? Because the people who will be most affected by these trade policies will be those who work for companies that are deciding right now about how to respond to the uncertainty. Many are frozen in place. We see in some data that companies are not doing capital expenditures, they're not hiring new workers. If this continues, the next step would be to reduce their workforce. It's not going to happen right away, because many companies are now building inventories and are very busy in anticipation of the tariffs.
If you're a homeowner, you might be doing some anticipatory buying as well. Perhaps you decided to purchase that new washing machine or refrigerator. If you are a home builder, the rise in lumber prices from Canada will encourage you to purchase it now, perhaps before it is actually needed. We are in this period which could last a few months before we see the true impact of these tariffs on inflation and on aggregate demand. I would urge you to ignore short-term data because it's going to look better than the underlying situation; it's going to be masking some of these intermediate and long-term effects.
House: So looking at those intermediate effects, are there particular sectors that you think may be more adversely affected by the policy, uncertainty, and actual shifts going on? And some that might be more insulated, particularly thinking about the career motif that sits in the background of our discussion.
Cohen: The situation is made even more tenuous right now because we don't know how this is going to play out. I'm going to give you one example: if you had asked everybody two weeks ago which sectors were going to be the most affected by tariffs, people would've said consumer electronics because of the tariffs on Chinese products coming into the United States. And then, lo and behold, the White House gave a pass to Apple and tariff exemptions to other consumer electronics companies. I don't know who else is going to get exemptions. Are these exemptions being done on the basis of economic impact? Or political sensitivities? We are not seeing the kind of transparency that we might like in terms of how these decisions are being made.
Let’s turn our attention to federal government employment in the United States. In prior meetings, I indicated that one of my concerns centered around potential weakening of government employment and oversight. In particular, I identified something called Schedule F, which was mentioned in Project 2025.
Schedule F is a plan, which is now in the process of being implemented, in which senior level civil servants – that is, the non-political appointees of the central government who are working at the highest levels – their jobs are reclassified as political. So you take the scientists and the experts in a number of categories and their jobs are changed from those based on professional credentials and experience and are reclassified as political appointees. Now, I believe that every president, whether I agree with their policies or not, is entitled to their political appointees. Normally those are the people at the top of the agencies. There are something like 10,000 of these political appointees. Schedule F related to the next 50,000 employees; these are the people who actually do the day to day job, run the agencies, do the scientific work, make decisions about where the government will be investing in science and engineering.
Those jobs are now in the process of all being converted to political appointees. So in addition to whatever you've heard about people losing their jobs, there are now 50,000 people who will be subject to dismissal, not because they've done something wrong, but because their jobs are now for political appointees. If you go back to the 19th century in the United States, we used to call this the Spoils System. To the winner goes the spoils. And it used to be that every time there was a presidential election, jobs in the U.S. government would switch over to people who have been politically helpful to the winner. And that was changed at the turn of the 20th century by Theodore Roosevelt, who basically said this is no way for the government to function. Mr. Trump was the first one to switch back to this other system. You may have heard about all of the so-called probationary workers who have lost their jobs, and that gets presented as them being rookies, relatively new hires. That does not mean they are inexperienced.
Many of the people who get hired into the federal government are coming from industry or academia because they have incredible expertise. But if they haven't had those jobs for more than two years, they are probationary. Also, somebody who's a terrific performer in the U.S. government and has just gotten a promotion, let's say a pretty high level civil servant, and they're going up to the next level. They are also counted as probationary because they are new in that position. Keep in mind that when probationary workers are being dismissed, a great deal of expertise is being dismissed. Many investors and reporters are focused on tariffs, but are not focusing enough on some of these other changes.
House: The combination of tariffs, erratic policymaking, changes in the politicization of the public service, immigration changes – are these all having the effect of unwinding what has been called American exceptionalism, which certainly manifested in the last year or two in an incredibly crowded U.S. equity trade?
Cohen: Why has the U.S. economy been the most successful of the developed economies for many decades? One critical reason has been our workforce. The other is investment in the future. The U.S economy has benefited from faster growth in the labor force than any other developed economy. And by the way, much faster labor force growth than in China. Immigration has been an important factor. Our native birth rate is 2.5%, faster than most other developed nations, but the increase in the US workforce has been more than 3% because we have welcomed immigrants.
Part of the current government policy is to discourage immigrants and to discourage international students. This to me is very worrisome, because if we are no longer viewed as a place where high potential, high-achieving people want to come our growth and overall success will be impeded.
The second factor of the U.S.’s better and stronger long-term economic growth has been that we've invested in the future. The United States has been the number one investor in basic science and R&D starting at the end of the 19th century. The United States federal government was a critical part of this investment in scientific research. And after the Second World War, the model that became the most effective way to accomplish this is for the federal government to provide the funding to universities. Why? Because universities and medical schools would be more creative in terms of the way the money would actually be spent and the projects that would be explored.
This is not a bug of the system. This was a feature of the system that was specifically designed because the United States had been spending money but not as effectively as some European countries that reached into universities for academic experts. I'm worried now by the acrimony we're seeing directed at various universities, particularly the nation’s research universities. And while lots of the conversation has been on the wealthy private schools, there have also been science grant withdrawals from public state universities in the United States which is hard to understand.
One of the great strengths of the U.S. university system has been not just our wonderful private schools, but our wonderful – what we call land grant – public institutions where many people who otherwise could not have afforded it have received strong university educations. Many of these public schools are in fact more dependent on the percentage of total federal grants than our private institutions. Even if you strip away the volatility and look at the policy in place, much of it doesn't make any sense to me.
