One of the most volatile market weeks in years was sparked by tariff announcements earlier this month. President Donald Trump's 10% universal tariff went into effect on April 5th, followed by his controversial reciprocal tariffs on April 9th. But hours after the latter set of levies took effect, Trump paused them for 90 days, sending markets soaring.
At the same time, the trade war with China escalated, with the U.S. imposing tariffs of 145% on most imports from China while China countered with 125% tariffs on U.S. imports, tempering the market rally. On April 11th, the administration announced temporary exemptions from the most recent China tariffs for smartphones, computers, routers and other electronics, though earlier tariffs remain in place. New tariffs on semiconductors are expected soon, and the president said on April 14th that he may offer relief from some tariffs on auto parts. The mixed signals have confused investors, companies and trade partners while contributing to a big drop in consumer confidence and projections for slower economic growth.
With Congress in recess for two weeks, lawmakers are likely to get an earful from voters in their districts about tariffs, jobs and prices. It will be interesting to see whether that contributes to any pushback from Congress on administration policies when lawmakers return to Washington at the end of the month.
What's next for the big tax and spending bill?
The House approved the modified "budget resolution" last week, a key step for Republicans as they try to enact the massive tax-and-spending-cuts bill that represents the heart of the president's legislative agenda. Passing the resolution unlocks the "budget reconciliation" process by which Republicans will try to pass the bill without support or input from Democrats. Now Republican leaders must craft the detailed bill in a way that placates different factions within the party that have different priorities. Both the House and Senate will be in recess for the next two weeks but will return in late April with the daunting process in front of them. Four quick thoughts on where things stand:
- The blueprint is finished, but much harder decisions lie ahead. What passed (on a razor-thin 216-214 vote) was the framework for what has been called "one big, beautiful bill." It sets the overall targets for tax cuts and spending cuts but includes none of the details. Now Congress will have to hammer out the specifics of every tax provision and every spending cut—and that is where things will get tricky. Republican leaders deferred resolving a host of internal conflicts to accomplish the goal of getting the blueprint approved. But those tough decisions cannot be postponed any longer.
- There is a long list of potential flash points. Among the controversial topics that will need to be ironed out among Republicans are whether the expiring 2017 tax cuts can be extended without counting against the total cost of the bill; what other tax cuts to include from a long list of proposals, including the president's call for no tax on tip income, overtime hours or Social Security benefits; whether the hoped-for $1.5 trillion in spending cuts can be achieved without impacting Medicaid; whether fiscal hawks in the House who want spending cuts north of $2 trillion can be placated when the Senate is unlikely to approve anything that has more than $1 trillion, if that, in cuts; whether and how much to increase the State and Local Tax (SALT) deduction cap, a key issue for Republicans in high-tax states like California, New York and New Jersey; how to deal with Biden-era clean energy tax provisions that have benefited some red states; and whether to allow the top individual income tax rate to rise to as high as 40% to pay for other provisions. And that's just a sampling of dozens of issues that Republican leaders will have to navigate in the weeks ahead.
- The debt ceiling timing could be a problem. The blueprint includes a $5 trillion increase in the debt ceiling, likely enough to take the issue off the table until after the 2026 midterms. The question is whether Congress can pass the massive bill before the date the U.S. will default on its debts. If the so-called "X date" comes while the bill is still being negotiated, lawmakers could have to break the debt ceiling off the main package and vote on it separately, which would bring its own set of challenges.
- This will all take a while to finalize. House committees are likely to begin the process of crafting different sections of the bill when Congress returns to Washington the week of April 28th. Republican leaders hope the bill can pass the House by Memorial Day. But even if that happens, the Senate operates more slowly. We continue to think that sending a bill to the president for his signature by August 1st would be a huge accomplishment—and that the process could last into the fall.
