President Trump believes it's worth risking pain to achieve his medium-term goal of rewiring the U.S. economy. He is attempting a form of economic shock therapy, while accepting there could be collateral damage.

Why it matters: That willingness to shrug off risks of inflation or recession is now rattling financial markets and confidence — and has itself emerged as the biggest near-term economic risk.

The administration has embraced that the economic disruption it envisions could be painful.

• That adds to the risk that if the economy starts to falter — and it hasn't so far, at least according to the high-level data — no cavalry will be coming from Washington to contain the damage.

The big picture: Trump is seeking to rapidly undo a global economic order that has been decades in the making. Americans enjoyed the fruits of cheap goods made around the world, at the cost of a diminished domestic manufacturing base.

• He envisions an economy with many fewer bureaucratic paper-pushers and much more factory work.
• He seeks to bring down the deficit while keeping taxes low — which only pencils out if there are major cuts to America's social welfare programs.

Coming "detox": "Could we be seeing this economy that we inherited starting to roll a bit? Sure," Treasury Secretary Scott Bessent said Friday on CNBC's "Squawk Box."

• "There's going to be a natural adjustment as we move away from public spending," Bessent added. "The market and the economy have just become hooked ... We've become addicted to this government spending and there's going to be a detox period."

Context: The mainstream view among Wall Street economists and Fed officials is that Trump inherited an economy that was in basically sound shape.

• The unemployment rate was low (4% in January). Inflation was far below its recent highs (2.5% for the 12 months ended January).

The Trump team rejects that view completely, arguing that Biden handed over an economy so terrible that it demands a wholesale rebuild. "Biden left him a pile of poop," as Commerce Secretary Howard Lutnick put it on Bloomberg TV last week.

• Trump, in this view, inherited an economy in which a seemingly healthy job market is, in fact, illusory.
• It's true that the federal government has been running budget deficits that are higher — 6 to 7% of GDP — than ever before seen outside of wars or economic crises.
• And job growth in recent months has indeed been fueled by hiring in state government employment and health care. The private sector has been in "recession," Bessent has argued.

State of play: Administration officials are increasingly acknowledging the potential costs of the adjustment.

• If trade wars mean U.S. farmers get shut out of foreign markets they've spent decades building, well, there "may be a little bit of an adjustment period" as Trump said this in this week's Congressional address.
• What if the stock market drops, hitting Americans' retirement accounts? "I'm not even looking at the market, because long term the United States will be very strong," Trump said this week.

Reality check: Economic change is often painful; just ask the U.S. manufacturing workers who lost their livelihoods amid the China shock of the early 2000s. Trump wants to make changes to the fabric of the global economy at hyperspeed — which comes with political peril.

• Americans really like cheap stuff (though Bessent says that's not the American Dream). Witness the outpour of anger at the inflation and shortages that erupted in the aftermath of the pandemic.
• It will likely take time for laid off government workers to find their way into new work in growing sector, during which time they are on the jobless rolls.

The bottom line: Americans who voted for Trump seeking a return to the low-inflation, steady-eddy conditions the prevailed in 2019 may be in for a rude awakening.

• But the president and his advisers believe they have a mandate for big-time change, whatever the costs.

The Federal Reserve is poised to leave interest rates steady, as it aims to separate "signal from noise" in the Trump administration's big changes to U.S. economic policy, chair Jerome Powell said Friday.

Why it matters: Amid fast-moving changes to trade and other policies, volatile markets, and slumping consumer sentiment, the central bank is looking to offer a sense of patience, as it waits for more decisive evidence of how the economy is changing.

• It implies the Fed's interest rate target will remain unchanged at its current level of 4.25% to 4.5% until clear changes in the economic backdrop emerge.

What they're saying: Powell noted that the Trump administration is implementing significant changes across trade, immigration, fiscal policy and regulation.

• It is the "net effect of these policy changes" that matters to the Fed, Powell will say at the Clark Center for Global Markets' monetary policy forum, according to a prepared text.
• "While there have been recent developments in some of these areas, especially trade policy, uncertainty around the changes and their likely effects remains high," he will say.
• "As we parse the incoming information, we are focused on separating the signal from the noise as the outlook evolves. We do not need to be in a hurry, and are well-positioned to wait for greater clarity," he adds.

Of note: Powell acknowledged recent survey evidence of greater economic angst, but suggested that those survey measures of the economy should not trigger policy adjustments.

• He noted that "recent surveys of households and businesses point to heightened uncertainty about the economic outlook."
• "It remains to be seen how these developments might affect future spending and investment. Sentiment readings have not been a good predictor of consumption growth in recent years," Powell said.

Between the lines: The cross-currents of Trump policies create a potentially volatile mix, and Powell and the Fed are looking for greater clarity on how it will all shake out before adjusting interest rate policy further.

• Restrictive immigration policy and tariffs tend to lower the economy's supply potential, fueling inflation. Deregulation, by contrast, could enhance the economy's supply potential.
• Federal spending cuts could, in the near term at least, slow business activity, raise unemployment and slow consumer demand.
• Some of those developments would point to higher interest rates, others to lower rates — so in the absence of clear evidence of which proves more powerful, the Fed is looking to stand pat.

"Our current policy stance is well-positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate" of maximum employment and steady prices, Powell said in the speech.

What's next: The policy-setting Federal Open Market Committee concludes its next meeting March 19 and is set to leave rates unchanged.

The president announces an audacious new tariff on social media. The media breathlessly quotes economists warning of peril ahead. The economy chugs along anyway.

Why it matters: While that was the pattern in 2018 and 2019, it may offer false comfort for what is to come in 2025.

• The Trump 2.0 trade war is already on a much larger scale, affecting many more products, than was ever seen in Trump 1.0.

The big picture: This time around, the president is choosing across-the-board tariffs over targeted ones, invoking a legal authority with fewer constraints, and not giving time for companies to plead their case for special exceptions.

• All of that increases the odds that the trade war will be more visible to Americans, disrupting supply chains and causing noticeable price hikes for certain items.

By the numbers: When Trump took office in 2017, tariff revenue was about 1.5% of total U.S. goods imports. By 2019, he had roughly doubled that to 2.9%, according to an analysis of federal data by the Yale Budget Lab.

• If the across-the-board tariffs implemented on Canada, Mexico and China this week remain in place the remainder of the year, that number is on track to soar to 9.5%, the highest since 1943.
• There were signs late yesterday the administration may be seeking to deescalate, but Trump has also threatened other large-scale tariffs, including on agriculture and automobiles.

Flashback: The 2018 to 2019 tariffs were implemented by invoking Sections 232 and 301 of trade statutes, the former giving the president authority to impose duties on national security grounds and the latter to combat unfair trade practices.

• Those laws demand a process of studies and appeals, which slowed their implementation while preventing unintended consequences.

By contrast, this week's new round of tariffs invoked the International Emergency Economic Powers Act, which gives the president broad powers with few checks "to deal with any unusual and extraordinary threat."

What they're saying: "During Trump's first term there was breathless coverage and obsession over tariffs but without any obviously discernible economic impact," Harvard's Jason Furman tells Axios. "This time around it is the opposite. The tariffs are just one of many, many stories."

• "But lost in that massive onslaught is the fact that they are much bigger, are coming much faster, and this time you may actually start to see them in the macro data," he says.

Reality check: That does not necessarily mean an abrupt slowdown, or a recession, or 2022-style inflation. The United States is a large country that grows most of its own food and generates most of its own energy.

Yes, but: Mainstream estimates point to this round of tariffs having economic impacts large enough for Americans to feel.

• Nationwide chief economist Kathy Bostjancic estimates that if sustained, they would subtract 1 percentage point from GDP growth this year and raise inflation by 0.6 percentage points.
• "The deterioration in confidence could very well lead businesses to pare or at least delay investments and new hires, consumers to delay purchases, and for financial risk assets, such as equities, to decline or increase in volatility," she writes in a note.

Top Trump administration officials are arguing that it is misleading to include government spending in the quarterly tally of GDP.

• It sets up a clash between the administration and economists over how to calculate the broadest measure of economic activity.

The big picture: GDP statistics are calculated the way they have been for the last eight decades for good reasons — but administration officials are correct that the accounting for government spending isn't ideal.

What they're saying: "You know that governments historically have messed with GDP," Commerce Secretary Howard Lutnick said Sunday on Fox News Channel's "Sunday Morning Futures."

• "They count government spending as part of GDP. So I'm going to separate those two and make it transparent," he said.
• "A more accurate measure of GDP would exclude government spending," Elon Musk wrote on X on Friday. "Otherwise, you can scale GDP artificially high by spending money on things that don't make people's lives better."

State of play: GDP aims to capture the value of all economic output produced in a given time period within U.S. borders. The formula for that tally, which you may recall from introductory economics, is that GDP = consumption + investment + government spending + net exports.

• So why is government spending included in that formula? Because otherwise GDP would not fully capture the value of goods and services produced.
• When the government buys a fighter jet, or builds a road, or educates a child, it reflects the production of goods and services. So if you exclude government spending from GDP, you aren't getting a full picture of U.S. output.

Zoom in: It is true, however, that government spending is counted in GDP by simply adding in the dollars spent, without any real test of how efficiently or productively the money was used.

• "If the government buys a tank, that's GDP," Lutnick said in the TV appearance. "But paying 1,000 people to think about buying a tank is not GDP. That is wasted inefficiency, wasted money. And cutting that, while it shows in GDP, we're going to get rid of that."
• It's true, as Musk and Lutnick suggest, that if the government hired a bunch of people to twiddle their thumbs all day, it would show up as higher GDP while not making anyone better off, save perhaps the thumb-twiddlers.

Of note: The Bureau of Economic Analysis — which Lutnick now oversees — acknowledges these limitations.

• "Difficult conceptual and practical problems arise in measuring the output of governments, primarily because most of this output is not sold in the marketplace," reads the bureau's handbook for GDP and related data.
• "If possible, it would be preferable to measure actual changes in the quantity or volume of the services provided, thus allowing for changes in productivity," the document notes.

Zoom out: More conceptually, it's not the job of economic statistics to make value judgments on what individuals, businesses or governments do with their money. It's just trying to get the math right.

• You might not agree that a given government expenditure was worthwhile, but that's true of every line of GDP.

For example, if somebody orders an absurdly priced $2,000 bottle of wine at a restaurant, that counts on line 20 of the GDP report as personal consumption expenditures on food services and accommodations.

• If a movie studio spends $100 million to make a terrible movie, that shows up on line 38 of the report, as fixed investment in entertainment, literary, and artistic originals.

Lutnick suggested the GDP statistics lack transparency about how government spending is incorporated.

• In fact, the data releases make crystal clear how much government contributes to overall GDP — and data-watchers can, and regularly do, exclude government for purposes of analyzing economic trends.

By the numbers: In Q4 of last year, overall U.S. output was an annualized $29.7 trillion, of which $1.9 trillion was federal government consumption and investment spending, and another $3.2 trillion state and local governments.

• Measures of activity that exclude government spending can give a better sense of the underlying trend in the economy than the headline GDP number.
• We're partial, for example, to real final sales to private domestic purchasers, which rose at a 5.4% rate in Q4. You can find it in Table 1, line 41 of the report.

The intrigue: Interestingly, the federal government's share of GDP has been relatively low of late. It was 6.4% last year, roughly the same as during the first Trump administration and well below Cold War levels. It peaked at 18% in 1953.

• Keep in mind that while federal spending on purchases and employee salaries count in these tabulations, transfer payments don't.
• So when the government sends out Social Security checks each month, that expenditure does not count toward GDP but does show up as personal consumption expenditures once recipients spend the money.

The bottom line: There are flaws and limitations in how government GDP statistics account for government spending.

• But they are well-known, transparent and the kinds of things economy-watchers can adjust for as they wish.

They're mere tremors at this point, not an earthquake. But worries about the outlook for U.S. economic growth are starting to mount.

Why it matters: On-again, off-again tariffs on major trading partners have added uncertainty to the business outlook, making hiring and investment decisions more complex.

• Consumers whose incomes depend on the federal government — whether as employees, contractors or benefit recipients — face the brunt of Trump administration cutbacks. This risk could make them more cautious in their spending.

State of play: Evidence these forces will restrain overall growth is only being seen in soft data so far — surveys of business and consumer sentiment, for example. The hard data shows little evidence of deterioration in spending, investment or hiring.

• But new growth worries have coincided with a steep drop in Treasury yields since the start of the year, which tends to reflect bond investors' growth expectations.

What they're saying: "With 3 million federal employees potentially worrying about their jobs and 6 million federal contractors worrying about their jobs, the risks are rising that households may begin to hold back purchases of cars, computers, washers, dryers, vacation travel plans, etc.," wrote Torsten Slok, chief economist at Apollo Global Management, in a note out Thursday morning.

• "We remain bullish on the economic outlook, but we are very carefully watching the incoming data for signs if this is an inflection point for the business cycle," he added.

Kansas City Fed president Jeff Schmid said in a speech Thursday morning that "discussions with contacts in my district, as well as some recent data, suggest that elevated uncertainty might weigh on growth."

• "This presents the possibility that the Fed could have to balance inflation risks against growth concerns."

Of note: Clients of one major bank are asking if it's time to think about using the word "recession" again.

• "As US data soften, clients have started asking us about the prospect of a US recession," wrote Barclays' Ajay Rajadhyaksha and Marc Giannoni in a note Wednesday. "We think the odds are still low, but have clearly risen."
• "A US recession remains improbable, but is no longer unthinkable in the coming quarters," they added.

Reality check: Over the last few years, amid Fed rate hikes and geopolitical strife, predictions of a major slowdown or recession have repeatedly been wrong.

• The new administration's policies also may be creating tailwinds from deregulation and the prospect of tax cuts.

The bottom line: The U.S. economy is a mighty tanker ship, almost always moving forward. But the number of warning signs that it could be pushed off-course is rising.

Bond markets are betting that inflation will stay elevated in the years ahead, and some evidence from business surveys and forecasters points in the same direction.

Why it matters: This belief suggests the Trump administration and the Federal Reserve face a headwind in securing a return to low inflation — concerns that have escalated just in the last few weeks, as the president has threatened tariffs on a variety of U.S. trading partners.

State of play: The gap between interest rates on standard U.S. Treasury securities and inflation-protected bonds gives a window into how much bond investors expect prices to rise in the future. That gap, known as the breakeven rate, has been on a tear in recent weeks.

• Bond prices now imply 2.7% annual Consumer Price Index inflation for the next five years, up from 2.4% at the start of 2025 and 1.95% as recently as last summer.
• The only times five-year breakevens have been higher, in a data series that dates to 2003, were during the peak of the 2022 inflation surge and a brief period in 2005.

There are hints in surveys that it isn't just bond traders who are revising their inflation outlook.

• The Philadelphia Fed's survey of manufacturers in its region showed that indexes for input prices and prices they can charge both rose to their highest levels in more than two years. The New York Fed's survey of manufacturers showed the same.
• The median professional forecaster upped its projection of 2025 CPI inflation to 2.8% from 2.4% three months ago, per a separate Philly Fed survey.

Between the lines: The Fed will be reluctant to cut interest rates again if the higher inflation expectations look to become more widespread and entrenched.

Yes, but: Longer-term measures of inflation expectations look less worrying. The bond market breakeven for annual inflation, in a window of five to 10 years from now, is down slightly this year — at levels consistent with the Fed's 2% target.

Reality check: The simmering inflation occurs against a general backdrop of business optimism for growth. CEOs are broadly bullish on the outlook for the years ahead, and the stock market is scraping new highs.

• The Conference Board's survey of CEO confidence, released Thursday morning, rose to its highest level in three years.
• The improvement "was significant and broad-based," Stephanie Guichard, a senior economist at the Conference Board, said in the release.
• "CEOs were substantially more optimistic about current economic conditions as well as about future economic conditions — both overall and in their own industries."

As Donald Trump pivots away from Europe and toward Russia, he's putting at risk the deepest and most important economic relationship in the world: that between the U.S. and Europe.

Why it matters: The U.S. economy has reaped enormous dividends from the way in which the U.S. government has provided a security guarantee to Europe. If that guarantee goes away, the dividends might, too.

The big picture: "No two other regions in the world are as deeply integrated as the U.S. and Europe," per AmCham EU, which collates such figures.

• More than 60% of foreign investment into the U.S. comes from Europe, and in the other direction, more than 60% of foreign investment by the U.S. goes into Europe.
• Similarly, U.S. companies employ about 5 million Europeans, while European companies employ some 5 million Americans.
• European companies are major employers in several Trump-supporting states, including BMW in South Carolina, Volkswagen in Tennessee, Airbus in Alabama, and Siemens in Texas and the Carolinas.

Zoom out: "Security goes hand in hand with interdependence," Abraham Newman, a Georgetown University political scientist, tells Axios.

• "From the Marshall Plan to the creation of the EU, the U.S. made the bet that if you solved security issues it would generate huge new wealth for U.S. companies. And it did," he says.
• Former U.S. Treasury secretary Hank Paulson tells a story of a Chinese official saying to him that "you have all the good allies." Effectively, China has always been stymied, in terms of competition with the U.S., by the fact that America is strongly allied with Europe.

Between the lines: The depth of the U.S.-EU relationship dwarfs anything that Russia can offer. Even before Russia first invaded Ukraine in 2014, for instance, U.S. goods exports to Russia were a mere $11 billion, roughly one-third of U.S. exports to Belgium alone.

• Russia, per the New York Times, claims American losses due to pulling out of Russia have totaled more than $300 billion. But that doesn't mean there's anything close to $300 billion of opportunity in reopening Russia to U.S. business.
• Edward Fishman, a former Russia sanctions lead at the State Department, tells Axios: "The U.S. is much better at turning off economic activity than we are at turning it on."
• Even if all U.S. sanctions on Russia were lifted tomorrow, most American companies would still be extremely wary of reentering a country led by Vladimir Putin, and would likely stay away.

What's next: If Europe no longer benefits from U.S. geostrategic protection, that in turn will affect the way American companies are viewed on the continent, per Georgetown's Newman.

• As U.S. companies become increasingly viewed as a mask for U.S. power, he says, the rhetoric surrounding them will move from complaints about fair competition to worries that they represent a security threat.

The bottom line: If Europe starts seeing the U.S. as an enemy superpower, the negative consequences for the U.S. domestic economy would likely be enormous.

The Elon Musk-led DOGE's latest update on an accounting of its cost-cutting measures to date raises more questions than answers: It didn't take long before at least one major error was identified in its receipts.

Why it matters: There is uncertainty about the accuracy of the self-reported audit that could, in theory, make DOGE's moves across the federal government more transparent.

• There are already concerns about the agency's access to databases and private data typically reserved for career staffers.

The big picture: The DOGE website said it canceled a contract for the U.S. Immigration and Customs Enforcement agency — for "program and technical support for the office of diversity and civil rights" — that was purportedly worth $8 billion.

• That is a big contract that alone would all but use up ICE's $9 billion budget.
• The contract was actually worth $8 million, as the New York Times and other publications have pointed out.

The intrigue: DOGE claims that its "total estimated savings" to date are roughly $55 billion. But there are questions about whether that sum is inflated. Bloomberg says the website lists $16.6 billion in savings.

Between the lines: The website accounts for the face value of a contract but does not seem to account for funds that are spread across several years. If some of the money has already been spent, that is money that is not technically "saved."

It is also unclear how cuts in one area might affect government revenue in another.

• Take layoffs at the Internal Revenue Service — rumored to begin as soon as today — that could result in fewer tax collections.
• The Biden administration made the opposite bet: bulking up IRS staff would result in higher collections.

💭 Our thought bubble, from Axios' longtime Musk-watcher Joann Muller: Musk's accounting of the litany of accomplishments at DOGE shares a similar lack of specificity with Tesla investor calls.

• He boasts about sales volumes going up or costs going down, for example, but provides very few numbers. Musk makes confident predictions about "orders of magnitude" growth rates that are "insane," with very little to support those claims.
• It's up to investors to dig into Tesla's SEC filings — or, in this case, whatever data DOGE makes public — to get the details.

For more than a century, Congress has entrusted many policy areas to agencies that the president does not directly control. President Trump seeks to change that with an executive order Tuesday night.

Why it matters: The order claims direct presidential authority over the work of federal boards and commissions designed by Congress to operate without day-to-day oversight by the White House, with especially broad implications in the financial regulatory arena.

• The order, pending legal challenges, creates more White House control of agencies, including the FDIC, SEC and CFTC.
• It covers the Federal Reserve in its role as a regulator of the banking system but explicitly excludes the setting of monetary policy from this new presidential oversight.

State of play: Independent agencies are led by presidential appointees who share the president's philosophy. But once installed, they are generally left to lead as they see fit.

• They oversee the writing of regulations and the enforcement of rules while, in many cases, navigating the politics of multimember boards with appointees from both parties.
• The idea is that agencies act on the president's big-picture agenda, but day-to-day agency decisions — how to regulate bank capital levels, for example, or which securities fraud cases to bring — are insulated from politics.

Driving the news: Trump seeks to upend all of that. The order states that these agencies' ability to exercise independent authority "undermine such regulatory agencies' accountability to the American people and prevent a unified and coherent execution of Federal law."

• The order requires previously independent agencies to submit all proposed regulations to the White House's Office of Information and Regulatory Affairs first.
• It states that the director of the Office of Management and Budget will set performance standards and objectives for independent agency heads and adjust their budgets, including stopping them from spending money on particular activities.

What they're saying: "Congress and presidents of both parties have created regulatory agencies structurally independent of the president because the bipartisan consensus for generations has held that this was in our economic interest," Aaron Klein, a senior fellow at the Brookings Institution, tells Axios.

• "This executive order upends that multigenerational bipartisan consensus."

Between the lines: The order turns the OMB director into a kind of uber-regulator, with power over agency heads across the government, including those who historically operated with little White House meddling.

The intrigue: Trump's leaving the Fed's monetary policy decision outside the purview of the new order is a relief for believers in the importance of separating control of the money supply from politics.

• But it doesn't answer some tricky questions about where the new presidential authority over the Fed's regulatory apparatus ends and its continued independence on monetary policy begins.
• Some major Fed functions, including its control of the payments systems that route trillions of dollars between banks and its lender-of-last-resort function to protect against bank runs, are at the intersection of bank regulation and monetary policy.

Europe faces two great crises — in the economic and security spheres — that are, ultimately, two sides of the same coin.

Why it matters: Europe has experienced subpar economic growth for a generation, and has underinvested in its own defense. Both problems are coming to a head, with the Trump administration's hostility as the catalyst.

• After decades of underinvestment and sluggish productivity, Europe faces receding U.S. security commitments, new tariffs on its exports, and a regulatory environment that puts domestic companies in a regulatory straightjacket.
• European elites are increasingly acknowledging that a lack of competitive fire, in both the economic and national security arenas, has resulted in overdependence both on U.S. companies to drive innovation and the U.S. government to defend Europe from Russia.

The intrigue: In a high-profile speech in Munich, European Commission president Ursula von der Leyen described a new world — one in which there is a heightened focus on geopolitical conflict and economic security.

• Von der Leyen proposed loosening the continent's fiscal rules to boost defense spending and protect member countries from possible threats from Russia — a rare move, last exercised at the COVID-19 pandemic's onset.
• "I believe we are now in another period of crisis which warrants a similar approach," Von der Leyen said.

Mario Draghi, the former European Central Bank president and Italian prime minister, said EU policies have strangled the economy more than the U.S. tariffs could.

• In an op-ed in the Financial Times on Friday, Draghi wrote that the EU has failed to address supply and demand issues caused by tough regulatory policy and depressed government investment. "Both these shortcomings — supply and demand — are largely of Europe's own making. They are therefore within its power to change."
• "Up to now, Europe has focused on either single or national goals without counting their collective cost," Draghi wrote.
• "But it is now clear that acting in this way has delivered neither welfare for Europeans, nor healthy public finances, nor even national autonomy, which is threatened by pressure from abroad," he continued. "That is why radical change is needed."

What to watch: In an extensive report on the EU's troubles, Draghi backed the idea of the continent borrowing as a whole for economic investment.

• "There are two very large systemic challenges coming down the pike," Heidi Crebo-Rediker, a senior fellow at the Council on Foreign Relations and former State Department chief economist, tells Axios.
• "It might be easier for Europe to negotiate on tariffs than to agree on a collective borrowing mechanism for the sheer amount of spending they need for their national security in as short an amount of time as possible," she adds.

A breakdown in the relationship between Europe and the United States, which has moved with breathtaking speed, is accelerating the recognition of long-developing economic problems.

Catch up quick: U.S. officials — including Secretary of State Marco Rubio — are in Riyadh, Saudi Arabia, to meet with Russian officials about the future of Ukraine. These are the first such talks since Russia's 2022 invasion.

• Absent from the talks over the continent's future are Ukrainian and European leaders, the latest blow in a recent series of events that dented U.S.-EU relations.
• President Trump has long claimed that the U.S. carried too much of the NATO burden in relation to EU countries. Last week, the administration all but said EU countries should not count on America for security.

Between the lines: In recent months, Europe's economic powerhouses have been in the midst of political chaos over budget disputes that, at least in one case, spooked the bond market.

• Germany, its largest economy, will hold an election in the coming days after different visions of how to ignite growth led to a government collapse.
• It is symbolic of Europe's already dismal economic reality — aging populations that will lead to a shortfall of workers, for instance — that now needs to adjust to higher defense spending demands.

The bottom line: "You're looking at a world where there is more uncertainty and the distance between peace and war is shorter," Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, tells Axios.

• "Europe needs a completely different industrial model but that takes time," Vistesen adds.

A core goal of President Trump's economic policy is to lower long-term interest rates. The administration has policy options to make it happen — both via Econ 101 macroeconomics and some more unconventional means.

Why it matters: If the Trump team is able to deliver on its goal, it would mean relief for homebuyers, corporate borrowers and the government itself. That said, many of the factors determining those rates are beyond the ability of even a president to control.

Catch up quick: "As it becomes clear that [the Department of Government Efficiency] is working, you will see the long-term Treasury" yields fall, Elon Musk said on X on Wednesday. All Americans "will benefit from lower interest payments on mortgages, small business debt, credit card and other loans."

• It echoed comments last week from Treasury Secretary Scott Bessent.
• These comments indicate the administration is focused not on jawboning the Fed to lower its short-term rate target, but on longer-term borrowing costs set in the global bond market.

State of play: The most straightforward, textbook way to lower long-term rates is by lowering the budget deficit. If the government can reduce deficits so that it's issuing fewer bonds in the years ahead, it would mean lower rates and less crowding out of other borrowing.

• House Republicans are currently jockeying over the parameters of a budget plan that, in its current form, would extend and expand upon Trump's 2017 Tax Cuts and Jobs Act while also cutting spending, for a net $3.3 trillion in additional deficits over the coming decade.
• "Meaningfully lower budget deficits would be the most effective way to bring long-term yields down but will also be difficult in the context of extending the TCJA and legislating additional tax cuts, even with sizeable spending cuts," wrote strategists at Deutsche Bank in a new note.

Yes, but: The Deutsche Bank team — Matthew Raskin, Matthew Luzzetti and Steven Zeng — also identified several less-conventional options the administration may wish to explore.

Zoom in: One option would involve relaxing bank regulations to exempt Treasury securities from counting toward the supplementary leverage ratio that constrains risk-taking by the biggest banks. It's a move that would incentivize those banks to buy more Treasury bonds.

• Another option is for Trump to use tariffs or other threats to coerce foreign governments into buying more Treasury bonds.
• A more dramatic move (and one that would require legislation) is eliminating federal income taxes on interest from Treasury securities, making them more attractive to individual investors.

The intrigue: The government currently owns 8,200 metric tons of gold, which are recorded on the Fed's balance sheet at the price of gold in 1973, only $11 billion. At today's price, it's actually worth more than $750 billion.

• Changing the accounting convention could create a one-time reduction in the Treasury's needed debt issuance, the Deutsche team wrote, subject to exactly how the Fed manages its balance sheet in response.
• Such a move could have negative ripple effects, however, including introducing unwelcome volatility in the government's finances as gold prices fluctuate.

Reality check: These less-conventional options "involve trade-offs with other policies and goals and are less likely to be less impactful than they might seem at first blush," Raskin, Deutsche Bank's U.S. head of rates research, tells Axios.

President Biden and a Democratic Congress took power in 2021 with a bold plan to propel the nation out of the pandemic, revitalize American industry and bolster the working class.

• It was a complete flop with voters.

Why it matters: In a scathing new essay on what went wrong with Biden-era economic policy, longtime Democratic economic adviser Jason Furman argues that the last administration was too quick to toss aside traditional economic orthodoxy around fiscal policy and other issues.

• That has implications for the new administration as well, Furman tells Axios, as the Trump team also rejects elements of mainstream economic thought on trade and tariffs.

Catch up quick: Furman, writing in Foreign Affairs, argues that the Biden administration's willingness to run the economy hot — to risk higher inflation in exchange for a turbo-charged rebound from the pandemic — turned out to be a bad bet.

• He writes that "the administration's desire to avoid repeating the mistakes of 2008 and its infatuation with the hot economy hypothesis cost the economy dearly," as inflation soared in 2021 and remains elevated four years later.
• The hot Biden-era job market did little to improve Americans' purchasing power, as inflation outstripped higher paychecks.

Meanwhile, the manufacturing revival the administration sought "has run up against the problem of crowding out," Furman argues, in which subsidies for semiconductors and green technology have been hamstrung by shortages and higher prices for materials, equipment and wages.

• High deficits, and the Fed's rate hikes meant to fight inflation, made it more expensive for companies to borrow and drove up the dollar, making U.S. manufacturers less competitive.
• The result: "The share of workers in manufacturing has continued to fall at the same rate as it did during the Obama and first Trump presidencies," he writes. "Manufacturing output has remained flat, as it has since 2014."

The intrigue: The new administration also seeks to create a manufacturing renaissance, though it's focused more on using tariffs, deregulation and pro-business tax policy to achieve it.

• Furman, who chaired President Obama's Council of Economic Advisers, argues that this approach carries similar risks to those that damaged the Biden economic legacy.

What they're saying: "President Trump is at serious risk of running headlong into the painful consequences of his choices," Furman tells Axios. "He has done even more than Biden to ignore economic analysis and trade-offs, whether they are in budgets or relations with our trading partners."

• "Unfortunately, you cannot simply pretend them away," he adds.

When President Trump demanded lower interest rates two weeks ago, it looked like a return to his 2018-vintage Fed jawboning. But his administration's stance on interest rates now looks more subtle.

Why it matters: The new administration seeks to bring long-term interest rates lower, Treasury Secretary Scott Bessent said Wednesday — and Fed rate cuts aren't necessarily the way to achieve that.

• The Fed controls short-term interest rates, but longer-term rates — which determine the federal government's borrowing costs, as well as home mortgages and many corporate borrowing rates — are set in the open market and reflect investors' expectations of how the economy will evolve.
• Bessent's case — which is consistent with Trump's recent rhetoric — is that what the economy needs is not further rate cuts from the Fed, but deregulatory and fiscal policies that improve the economy's supply-side potential.

What they're saying: Appearing Wednesday on Fox Business, Bessent said that the president wants lower rates but that "he and I are focused on the 10-year Treasury and what is the yield of that?" The Fed, he told Larry Kudlow, "did a jumbo rate cut and the 10-year rate went up."

• The president "is not calling for the Fed to lower rates," Bessent added. "He believes ... if we deregulate the economy, if we get this tax bill done, if we get energy down, then rates will take care of themselves and the dollar will take care of itself."
• "Now, I've seen, this year, despite the growth estimates going up, 10-year [yields] coming down because I believe the bond market is recognizing that ... energy prices will be lower and we can have non-inflationary growth."
• "You know, we cut the spending ... we get more efficiency in government, and we're going to go into a good interest rate cycle."

The intrigue: When the Fed elected not to cut its short-term interest rate target last week, Trump did not attack the central bank for that non-action. Instead, he slammed the Fed for allowing inflation to take off in the first place.

Between the lines: Trump has no compunction about bashing the Fed when it is running monetary policy tighter than he would like, as in 2018. But that is not the current stance of his administration.

• Bessent's observation that longer-term rates have risen since the Fed began its rate-cutting cycle in September is accurate.
• One possible factor is that bond investors believe the Fed eased policy more than was justified by economic conditions, which would imply higher rates and inflation in the years to come.
• It's the inverse of a pattern seen in late 2015 and late 2018, when the Fed raised its policy interest rate but longer-term rates fell, as traders bet that they had made a policy error that risked recession.

Of note: Bessent and other Trump allies previously sharply criticized the Biden administration for shifting the Treasury's debt issuance toward shorter-term securities, which they viewed as a politically motivated shadow monetary stimulus.

• But in the first bond issuance announcement of Trump's term on Wednesday, the Treasury Department stuck with its Biden-era balance of short-term and long-term debt.
• That contributed to a drop in longer-term yields Wednesday.

When President Trump signed an executive order on Monday calling for the creation of a U.S. sovereign wealth fund, it contradicted years of conservative thought.

The big picture: Trump wants the ability to invest public resources, using the type of fund that is more commonly deployed by countries with huge surpluses (frequently due to oil wealth) that need to be directed somewhere productive.

• Conservative and libertarian thinkers have traditionally been hostile to the idea of the government taking on such a role.

What they're saying: "The potential for cronyism with a sovereign wealth fund is dizzying, and the record of current government efforts to direct investment should not give anyone confidence that it would be competently or fairly managed," wrote Dominic Pino in National Review yesterday.

• "The United States has a ton of wealth," he adds. "The federal government is a poor steward of the chunk of it that it already controls. It should control less, not more."

Flashback: In 2005, the George W. Bush administration sought to add private accounts to Social Security that would allow individuals to invest their program contributions in the stock market.

• But it did not propose the government simply invest some of the Social Security trust fund in stocks, reflecting concern about government meddling in the private sector.
• In 2001, Federal Reserve chair Alan Greenspan endorsed tax cuts on the logic that then-forecast budget surpluses meant the United States was at risk of paying off the national debt and then investing surpluses in the private sector.
• "I believe, as I have noted in the past, that the federal government should eschew private asset accumulation because it would be exceptionally difficult to insulate the government's investment decisions from political pressures," Greenspan said.

Go deeper: Raising tariffs would hit working-class Americans harder

The Federal Reserve left interest rates unchanged on Wednesday after three consecutive cuts since late last year.

Why it matters: The Fed is halting rate cuts as inflation looks more persistent, with some officials worried Trump's economic agenda might further ignite price pressures.

Between the lines: The Fed's policy statement released on Wednesday hinted that recent indicators have pointed to a bumpy process in bringing inflation down.

• The policy statement, which is closely watched for subtle changes, no longer included December's language that inflation "has made progress" toward its 2% target. The statement said only that inflation "remains somewhat elevated."
• But the policy statement suggests that Fed officials have upgraded their assessment of the labor market as hiring continues to keep pace. "The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid," according to the policy statement.
• In the previous statement, the Fed said hiring conditions had "eased" and that the unemployment rate had moved up, though it remained historically low.

What they're saying: "I think policy is well positioned," Powell said in his post-statement news conference, noting that the unemployment rate has been "broadly stable now for six months" and inflation falling.

Driving the news: The Fed's decision leaves interest rates at a range of 4.25% to 4.5% — higher than the ultra-low borrowing costs that preceded the pandemic but roughly a full percentage point below last year's peak rates.

• The decision was unanimous. Two separate officials dissented in September and December.

The intrigue: The rate decision is the first since the inauguration of President Trump, who initially nominated Fed chair Jerome Powell in 2017.

• Fed officials last month projected they would cut rates twice in 2025, half as many cuts as previously estimated.
• Those projections also showed inflation remaining elevated for a longer period — a result some Fed officials expect to come from Trump's deportation and tariff policies, according to minutes from the central bank's December policy meeting.

What to watch: The decision sets up renewed criticism of the Fed from the White House, which dates back to Trump's first stint in office.

• Speaking virtually at the World Economic Forum, Trump said he would demand that the Fed lower interest rates — a threat that undermines the central bank's political independence.
• Asked about Trump's demand, Powell did not directly address his comments, saying "I'm not going to have any response or comment whatsoever on what the president said."
• Powell did say he has had no contact with Trump.

Go deeper: What to know about Trump's ability to move interest rates

Editor's Note: This story has been updated to add the Fed's news conference.

The Trump administration has directed agencies to suspend all federal grants and loans starting at close of business Tuesday.

Why it matters: The new administration is showing signs — in its unilateral actions and legislative strategy — that it is more serious about fiscal austerity than the last time President Trump was in office.

• That implies a very different fiscal policy for Trump 2.0, with pain ahead for federal funding recipients as well as downward pressure on inflation and interest rates.

Driving the news: The new directive is an audacious and legally dubious move, instructing agencies to "temporarily pause all activities related to obligation or disbursement of all Federal financial assistance, and other relevant agency activities" that could be affected by executive orders.

• Payments to individuals — including Social Security and Medicare — are exempted from the order.
• There is great uncertainty about how widely it will be applied, how long it will last, and whether it will be upheld by the courts. Legal scholars are skeptical.
• In effect, the administration is seeking to suspend billions in spending that was passed by both houses of Congress and signed by President Biden with a two-page memo from the acting director of the Office of Management and Budget.

Yes, but: Whatever happens next with this specific order, it's only the latest sign that this administration is dead-set on slashing federal outlays — and willing to tolerate any political backlash it may cause.

• Congressional Republicans are looking to spending cuts, particularly for Medicaid and Biden-era climate initiatives, to help offset the fiscal cost of tax-cutting plans.
• Treasury Secretary Scott Bessent has set a goal of a budget deficit of 3% of GDP, achieved through spending reductions. That implies hundreds of billions of dollars a year in cutbacks.
• Elon Musk's Department of Government Efficiency has pivoted its emphasis somewhat in recent weeks toward internal operations of agencies, but it has set reducing spending as a major goal.

Flashback: In Trump's previous term, his administration offered big cutbacks in its budget proposals — but didn't achieve them in practice.

• Discretionary federal spending was 13% higher in 2019, on the eve of the pandemic, than it was in 2016 before he took office. It was little changed as a percentage of GDP.

Between the lines: While meaningful spending reductions would be good for the government's medium-term fiscal trajectory, they would also impede growth in the near term.

• It would, all else equal, exert a downward tug on inflation and justify lower interest rates from the Fed to offset that drag.
• Kevin Warsh, a potential Fed chair nominee, recently accused Fed officials of "cherry-picking" by fretting about the inflationary impact of tariffs while failing to factor in the possibility that spending cuts would "materially reduce inflationary pressures."

In case you were placing bets on how long into his second term it would take for President Trump to start weighing in on interest rate policy, we learned the answer Thursday: 71 hours.

Why it matters: Trump telling the Fed what he thinks it should do is nothing new. But the details of the president's message about interest rates, inflation, and oil prices are worth parsing.

• They shed light on how his administration views energy markets as central to its broader macroeconomic agenda.

Catch up quick: Speaking virtually to the World Economic Forum, Trump said he'll "demand that interest rates drop immediately."

• Later, taking questions in the Oval Office, he added that "when oil prices come down, everything's going to be cheaper for the American people," and that lower energy prices are "going to knock out a lot of the inflation. That's going to automatically bring the interest rates down."
• He said he will speak to Fed chair Jerome Powell about rates policy "at the right time." Compared to the Fed, he said, "I think I know interest rates much better than they do, and I think I know it certainly much better than the one who's primarily in charge of making that decision."
• "If I disagree, I will let it be known," he added, a statement nobody who has paid any attention would doubt.

Zoom out: As in his first term, Trump rejects the modern norm of presidents not publicly commenting on or recommending interest rate policy. What's new is his emphasis on energy abundance as the reason he believes the Fed should cut rates.

• The new administration is all in on encouraging more domestic production of oil and gas.
• Also on Thursday, Trump pressured Saudi Arabia and other OPEC countries to pump more oil to bring down prices.
• Domestic producers will be reluctant to amp up output if prices are falling due to higher output overseas.
• But internal contradictions aside, there's little doubt that Trump views bringing energy prices down as the key mechanism by which he intends to reduce overall inflation.

State of play: The Fed is likely to leave its target interest rate unchanged at a meeting concluding this coming Wednesday. As of mid-December, the median official of the central bank saw two rate cuts on the way this year.

• Further clear progress toward inflation coming down would accelerate those plans.
• Energy prices are perhaps the easiest set of prices to monitor in real time. Crude oil futures trade minute by minute, and retail gasoline prices are updated every day. So if Trump succeeds at bringing down energy prices, the Fed will know it and can quickly factor it into policy decisions.

Yes, but: If energy prices were to drag down overall inflation this year, the Fed may not react as aggressively as Trump hopes.

By the numbers: Energy only constitutes 6.4% of the Consumer Price Index. While gasoline prices and home heating bills loom large in the public consciousness, they are a relatively modest portion of people's total spending.

• Moreover, central banking's conventional wisdom is that moves in energy and food prices tend to be one-off shifts, rather than reflections of underlying inflation trends, and don't demand a policy response.

That said, lower energy prices would have some impact on other prices across the economy — lower airfare, shipping costs, and more — helping bring core inflation down as well.

• So at the margins, at least, it would support the case for more rate cutting.

The intrigue: Right now, Fed officials are particularly attuned to ensuring that consumer and business inflation expectations reanchor at their 2% target after four consecutive years of overshooting that target.

• A drop in fuel prices, even if it's a one-time occurrence, could help that cause — at a minimum, it could help offset any one-off surge in some prices due to higher tariffs.

What's next: Powell is set to take questions from the media Wednesday afternoon following the Fed's policy meeting. We can look forward to questions about how the Fed intends to react to the president's pressure.

Economic orthodoxy is out. Rule-busting and experimentation are in. That's a key takeaway from this week's gathering of top executives and world leaders at the World Economic Forum in Davos, Switzerland.

Why it matters: Economic mini-experiments are happening in nations big and small as government officials embrace tariffs, protectionism, anti-immigration and other policies.

• The goal is to invigorate economic growth after tried-and-true policies have failed, despite warnings from mainstream economists that such approaches will damage the economy.
• However, the conventional wisdom around the economic benefits of free trade and a more interconnected world became that for a reason — and risks abound.

Driving the news: "My message to business is simple: Come make your product in America, and we will give you the lowest tax rate on Earth. But if you don't make the product here, you will have to pay a tariff," President Trump told the gathering in a virtual appearance — a reminder that the world's largest economy is led by a figure who rejects the mainstream economic view that tariffs are harmful.

What they're saying: Top executives may not love the prospect of big tariffs but say they believe the set of policy changes on the way will be good for the economy on net.

• "Lower regulatory burden will result in higher profit margins, will then allow us to manage the tariff burden differently," Bank of America CEO Brian Moynihan said in an interview with Axios on Thursday, so long as tariffs are used "in moderation."
• "We absorbed the tariffs put in during the first Trump administration and they never came off. Ten years later, we're talking about outsized economic growth relative to trend and relative to the rest of the world," Moynihan said.
• Or as JPMorgan CEO Jamie Dimon put it to CNBC on Wednesday when asked about tariffs, "If it's a little inflationary but it's good for national security, so be it. I mean, get over it."

The intrigue: For the second year in a row, Argentine President Javier Milei gave a special address at Davos criticizing mainstream economic thought.

• "I say to all global leaders, it is time to break free of the script," Milei said. "The truth is that there is something badly mistaken about the ideas that have been promoted through forums such as this one."
• "It is essential to break these ideological chains if we want to usher in a new golden age," he added, borrowing a phrase from Trump's inaugural address.

What to watch: European leaders face a harsh reality about their economy: Take a new approach, or fall even further behind after its yearslong slog.

• Officials in Germany are debating whether to upend a longtime debt rule enshrined in their constitution to jumpstart the stagnant economy.
• Speaking in Davos, German Chancellor Olaf Scholz pushed to expand borrowing to invest in infrastructure — an idea that helped tank the government last year.
• The nation's top central banker backed the idea, telling a German newspaper that the longstanding debt rule has worked well. "But now we live in a world of tectonic change and we have to address that. ... We have to start thinking outside the box."

When nations raise economic barriers as tools of foreign policy, it could lead to a meaningful economic cost, a report out Thursday from WEF and consultancy Oliver Wyman finds.

State of play: The report examines the likely consequences if world leaders continue their march toward greater use of sanctions, export controls, tariffs and other tools of statecraft that create bigger economic barriers between nations.

• In particular, it looks at the risk of falling into an increasingly bifurcated world, with separate financial systems for China and Russia versus the West.

By the numbers: Financial system fragmentation — dividing the world into fully separate blocs — would reduce global GDP by up to 5%, or $5.7 trillion a year, the report finds.

• The hit would be disproportionately felt in smaller emerging economies, which could see GDP losses of up to 11%.

Between the lines: In the United States, the use of sanctions as a geopolitical tool has ramped up steadily for two decades, across administrations. Trump imposed tariffs in his first term in office that the Biden administration kept in place.

• The last many years have been, in effect, a one-way ratchet toward a world with more barriers to the flow of money, goods and people.
• This has made countries with which the U.S. has hostile relationships more eager to develop financial networks of their own, even at a cost of efficiency.

The bottom line: "We're not saying that these type of economic statecraft tools shouldn't be used," Daniel Tannebaum, an author of the report and partner at Oliver Wyman, tells Axios, "but that they should be used smartly and to ensure no unintended consequences to the global economy."

President-elect Trump's administration will be intently focused on making the U.S. border more secure and deporting people who are in the country illegally, but may prove more open to legal immigration of highly skilled workers.

• Done right, that would be an economic boon, a new paper argues.

Why it matters: The report, out Tuesday morning from the centrist Economic Innovation Group, finds that when some of the world's most talented and entrepreneurial people are allowed into the United States, the results are faster growth, higher wages for native-born citizens, and lower fiscal deficits.

• It is America's "not-so-secret weapon," they write, while identifying numerous weaknesses in current policy that prevent those benefits from fully accruing.

State of play: MAGA world has been roiled in recent weeks by a clash between Trump allies (led by Elon Musk and Vivek Ramaswamy) who want more legal immigration of highly skilled workers and the nativist right (including Steve Bannon and Laura Loomer) who want less.

• Trump sided with the pro-skilled immigration crowd last month.
• While that conversation specifically focused on the H-1B visas, it implies some broader openness to rethinking how America might open its doors to the world's best and brightest, as Musk and Ramaswamy seek.

By the numbers: The authors calculate that under the current H-1B program, the typical skilled immigrant pays more than $32,000 per year in federal taxes, while consuming only about $3,500 worth of government services.

Zoom in: "Our high-skilled immigration system should be designed first and foremost to advance the national interest of the United States and the interests of its communities and workers," write Adam Ozimek, Connor O'Brien and John Lettieri.

• "Designed well, immigration policy can make our workers more productive, make American industry more globally competitive, spark new growth in left-behind parts of the country, and improve living standards nationwide," they add.
• They argue that the system should be based on bringing in workers with the highest earnings, as opposed to the lottery system used in the H-1B program or offering visas based on education.
• This, they argue, would ensure it's the immigrants with unique skills and the greatest ability to add to economy-wide productivity who are allowed in — not just undercutting wages of native-born workers.
• The authors also advise abandoning quotas by country, further pushing toward a system based on merit that brings in tippy-top talent.

What they're saying: "The fact that the president-elect has reaffirmed his support for high-skilled immigration presents a very interesting moment where what has been an afterthought in our broader immigration has a chance to become a centerpiece, as we think it should be," Lettieri, the president of EIG, tells Axios.

• "There's enormous pressure to turn the tide on the fiscal outlook of the country and to find ways to boost the economy that don't carry a huge price tag," he adds. "There are very few levers to pull that meet those criteria."

The multitrillion-dollar bond market is sending a message to President-elect Trump and the new Congress: There is no fiscal free lunch to be had.

Why it matters: A surge in longer-term borrowing costs over the last couple of months may reflect deepening concern about high fiscal deficits among global investors who buy U.S. government debt.

• Regardless of the cause, it implies that as Republicans seek to extend Trump's tax cuts beyond this year, markets will pressure them to find spending cuts or other deficit-reducing offsets.

Driving the news: The yield on 10-year U.S. Treasury notes reached 4.71% Wednesday morning, up from 3.62% in mid-September.

• Bloomberg cites evidence from futures markets that traders are positioning themselves for protection if rates were to rise further, to north of 5%.

The intrigue: This upward shift in longer-term rates has come despite a full percentage point of Fed interest rate cuts since September — with most Fed officials expecting a couple more rate cuts this year.

• It is a reminder that while the Fed controls short-term interest rates, longer-term rates are set in the bond market based on the outlook for inflation, growth, deficits and more.
• The details of why long-term rates are on the rise are important. This surge in rates has mostly not been driven by a changing inflation outlook, at least based on the relative prices of inflation-protected bonds.
• What appears to be happening is a rise in the "term premium," the compensation investors demand for the risk of buying longer-term debt.

State of play: It is impossible to know for sure why the term premium moves as it does, and technical factors around supply and demand for bonds are likely in play. But investor wariness of looming deficits is a textbook reason.

• Asked about the rise in yields at an event in Paris this morning, Fed governor Christopher Waller noted "more and more attention, concern about fiscal deficits."
• Waller also affirmed that he expects further Fed rate cuts to be justified this year, and said he doesn't expect tariffs to have a "significant or persistent effect on inflation."

What they're saying: "The market is telling us something, and it is very important for investors to have a view on why long rates are going up when the Fed is cutting," writes Apollo's Torsten Slok, noting it is a "highly unusual" situation.

Between the lines: Regardless of exactly why yields have surged, the fact that they have points to a very different macroeconomic environment than the nation faced eight years ago, when Republicans passed sweeping tax cuts in the first Trump term.

• In January 2017, the 10-year yield was a mere 2.4%.
• Borrowing costs are now meaningfully higher than forecast in the Congressional Budget Office's most recent projections. CBO's June budget forecasts assumed the 10-year yield would be 4.1% in 2025 and lower thereafter.

The bottom line: With rates higher, any given deficit-expanding policy will come at a higher cost — in terms of interest expense and higher rates — than it did when Trump was last in the Oval Office.