April 7, 2025
Releases
Consumer Credit
February 2025: U.S. Consumer Credit Decreased At An Annualized Rate Of 0.2 Percent, With Revolving Credit Increasing And Nonrevolving Credit Decreasing. According to the Federal Reserve, “In February, consumer credit decreased at a seasonally adjusted annual rate of 0.2 percent. Revolving credit increased at an annual rate of 0.1 percent, while nonrevolving credit decreased at an annual rate of 0.3 percent.” [Federal Reserve, 2025-04-07]
Context
Combining this data with the tepid expansion in durable goods give a picture of February as showing a hint of precautionary behavior. This matches what was seen in the BEA’s February Personal Income and Outlays report, where consumption expenditures increased much slower than income, as households cut back on service spending for the first time in three years.
Stories Of Note
Housing
FHFA Chief Bull Pulte Has “Sparked Chaos” With The Speed Of His Changes, Posing Risks To Housing Finance. According to Semafor, “President Donald Trump’s Federal Housing Finance Agency director is jettisoning executives and policies at breakneck speed, sparking chaos at the mortgage firms he oversees as his ultimate goal remains elusive even to Republicans. The uncertainty is sparking fears that FHFA chief Bill Pulte could next seek to reduce the footprints of Fannie Mae and Freddie Mac, whether through further policy changes or layoffs — a move that would risk making housing less affordable, just as President Donald Trump’s tariffs threaten to do the same.” [Semafor, 2025-04-07]
- After Pulte Fired Board Members And Top Executives At Fannie And Freddie, He Installed Himself As Chairman Of Both GSEs. Then, He Issued Policy Changed Over Social Media, Causing Chaos. According to Semafor, “The upheaval began last month, when Pulte fired scores of board members and top executives at Freddie and Fannie, then made himself chair of both companies’ boards, setting in motion a frenetic return-to-office. It continued with more firings — including those of Freddie Mac’s chief compliance and ethics officer — and a series of policies rescinded via social media.” [Semafor, 2025-04-07]
Context
The GSEs (Fannie and Freddie) are vital to the continued functioning of the housing market. The way that mortgages are made is that as long as they are below a threshold (one that is dependent on location, but usually around $760,000), the issuer will sell the mortgage to the GSEs. Those GSEs can then bundle the mortgages and sell them to investors, collecting a spread and providing liquidity to mortgage lenders, thereby lowering mortgage rates.
Claims on the loans bundled by by the GSEs are guaranteed by the U.S. Government, which means that GSEs can borrow to fund their operations at a rate that is almost as low as that of the Treasury. All of this keeps mortgage rates lower than they would otherwise be, and provides stability to the housing market.
When a borrower is looking to get a mortgage that is larger than a GSE will buy (called a jumbo loan), the process is considerably more involved, and rates tend to be higher. With the Trump administration’s goal of reducing the size of government, there has been talk of reducing the footprints of the GSEs (referenced in the Semafor article). An easy way to do that would be to either lower the jumbo threshold, or allow it to grow more slowly than housing prices do. Another option would be to reprivatize them, which would definitely be a giveaway to wall street, and could have even more negative consequences.
“Liberation Day” Fallout
Matthew C. Klein: The Liberation Day Tariffs Would, Under Constant Imports, Increase Taxes By Two Percent of Output. [Matthew C. Klein, 2025-04-04]
Bloomberg Headline: Price Hikes Are Already Rolling IN From Tariff-Hit Businesses [Bloomberg, 2025-04-07]
Oil Futures Fell More Than Ten Percent Below Where American Producers Could Profitably Drill New Wells. According to Bloomberg, “WTI prices for next year are now trading close to $58 a barrel and shale-oil company shares are down more than 15% since Trump announced his tariff policies. A survey by the Dallas Federal Reserve last month said average prices need to be $65 to profitably drill new wells.” [Bloomberg, 2025-04-06]
Following Trump’s Tariff Announcement, The Maker Of Jaguar And Land Rover Cars Paused Imports To The United States. According to Bloomberg, “UK automaker Jaguar Land Rover is pausing shipments of its cars to the US following the introduction of tariffs by Donald Trump’s government. The Coventry, England-headquartered company is putting these exports on hold this month as it looks at ways to address the new trading terms, a spokesperson said on Saturday. The US government introduced a 25% tariff on imported cars, which went into effect on Thursday. The Jaguar Land Rover move is the latest example of the global fallout from the policy, with other automakers also rethinking their business strategies.” [Bloomberg, 2024-04-05]
“Reciprocal Tariff” Calculation
The Tariff Formula Announced By The Trump Administration Was Similar To What Popular LLMs Suggested. According to Twitter user @krishnanrohit, “This might be the first large-scale application of AI technology to geopolitics.. 4o, o3, Gemini 2.5 pro, Calude 3.7, Grok all give the same answer to the question on how to impose tariffs easily[.]” [Twitter user @krishnanrohit, 2025-04-02]
\[ \Delta \tau_i = \max \left\{10 \%, \frac{x_i - m_i}{\varepsilon \cdot \varphi \cdot m_i}\right\} \]
AEI: Using The Sources The Trump Administration Cited, The Country Specific Tariffs They Announced Are 3.78 Times Too High. According to the American Enterprise Institute, “Though in effect the formula for the tariff placed on the United States by another country is equal to the trade deficit divided by imports, the formula published by the Office of the US Trade Representative has two additional terms in the denominator that just so happen to cancel out: (1) the elasticity of import demand with respect to import prices, \(\varepsilon\), and (2) the elasticity of import prices with respect to tariffs, \(\varphi\). The idea is that as tariffs rise, the change in the trade deficit will depend on the responsiveness of import demand to tariffs, which depends on how import demand responds to import prices and how import prices respond to tariffs. The Trump Administration assumes an elasticity of import demand with respect to import prices of four, and an elasticity of import prices with respect to tariffs of 0.25, the product of which is one and is the reason they cancel out in the Administration’s formula. However, the elasticity of import prices with respect to tariffs should be about one (actually 0.945), not 0.25 as the Trump Administration states. Their mistake is that they base the elasticity on the response of retail prices to tariffs, as opposed to import prices as they should have done. The article they cite by Alberto Cavallo and his coauthors makes this distinction clear. The authors state that “tariffs [are] passed through almost fully to US import prices,” while finding “more mixed evidence regarding retail price increases.” It is inconsistent to multiply the elasticity of import demand with respect to import prices by the elasticity of retail prices with respect to tariffs.” [American Enterprise Institute, 2025-04-04]
Brexit as a Precedent
Following The UK’s Detachment From Its Number One Trading Partner, The Average Brit Wound Up Around $1,100 Per Year Worse Off. According to the Wall Street Journal, “The stock market has its worst day in years. Ominously, the currency also falls. America 2025? No, Britain 2016—the day after U.K. voters chose to quit the European Union. President Trump’s decision to impose wide-scale tariffs raises a question: What happens when a developed economy throws up barriers with its biggest trade partners? Brexit offers a few clues. Britain’s decision to detach from the EU trading bloc was an unusual experiment in deglobalization. In hindsight, it foreshadowed Trump’s first election victory and was a leading indicator that not everyone was happy about decades of freer trade that led to a broad rise in global prosperity but also created losers in industrialized nations. Although the effects are still playing out, Brexit has widely come to be seen as an act of economic self-harm. The U.K. economy is likely weaker than it otherwise would have been. Politicians have spent more money and attention on parts of the country that were hardest hit by deindustrialization, but they have struggled to turn things around. The instant view of financial markets, it turns out, was broadly right. One thing is certain, and could indicate what is in store for the U.S.: The uncertainty surrounding Brexit damaged business investment, the lifeblood of an economy. While it is impossible to know for sure, several economic models estimate that Britain’s economy would be trading about 15% more with the rest of the world and be 2% to 5% bigger had it never left the bloc, much of that due to weaker investment. Put differently, the average Brit would be some $1,100 a year better off.” [Wall Street Journal, 2025-04-05]
- Brexit-Related Uncertainty Stalled Business Investment For Almost A Decade. According to the Wall Street Journal, “One clear red flag for the U.S. from Britain’s Brexit experience is the costs of uncertainty. Business investment in the U.K. stalled from the 2016 referendum until about 2022-23, made worse by the pandemic and a chaotic succession of British governments. Weaker investment means less money going into areas like manufacturing and technology that drive productivity and output over the long run.” [Wall Street Journal, 2025-04-05]
Walter Bloomberg Tweet
Within About 15 Minutes, A Tweet From An Anonymous Account Claiming A Tariff Delay Caused The S&P 500 To Add $2.5 Trillion, Before It Evaporated As The Story Was Debunked. According to Bloomberg, “The headline that appeared to trigger it all seemed believable enough to traders desperate for some good news — even if it came from an obscure social-media account. ‘HASSETT: TRUMP IS CONSIDERING A 90-DAY PAUSE IN TARIFFS FOR ALL COUNTRIES EXCEPT CHINA,’ read the post on X. As stocks started to surge, the reposts piled up, followed by nearly identical headlines from major news outlets, including CNBC and Reuters. Within seven minutes, the S&P had added over $2.5 trillion in value. And then, just as quickly, it evaporated. The White House said the remarks attributed to Kevin Hassett, the National Economic Council director, were ‘fake news’ and stocks plummeted again. CNBC and Reuters acknowledged the mistake in statements and issued corrections. (Bloomberg News didn’t publish the headline. Bloomberg did note to listeners of its Equities Squawk that unconfirmed social-media reports of a possible tariff delay had pushed the market higher.)” [Bloomberg, 2025-04-07]
Outlook
Risk vs Uncertainty
Risk and uncertainty represent distinct economic challenges, with vastly different implications. Risk is manageable through standard financial mechanisms. Markets can (although it isn’t always easy, as demonstrated by the rising expenses of risk management at multi-manager hedge funds) price risk, requiring higher returns for riskier investments without seriously impeding growth.
Uncertainty, however, is economic kryptonite. When individuals and businesses cannot even determine the probability distribution of outcomes—like during chaotic policy shifts—rational actors postpone decisions until clarity emerges. This collective delay creates a dangerous feedback loop: consumption and investment freeze, hiring stalls, and activity plummets across the economy. Unpredictable government policy can devastate growth far more than consistently challenging but predictable environments.
Social Security’s Declining Reliability
The Combination Of Job Cuts And DOGE’s Expanded Anti-Fraud System Have Caused Repeated Crashes Of The Social Security Website. According to the Washington Post, “Retirees and disabled people are facing chronic website outages and other access problems as they attempt to log in to their online Social Security accounts, even as they are being directed to do more of their business with the agency online. The website has crashed repeatedly in recent weeks, with outages lasting anywhere from 20 minutes to almost a day, according to six current and former officials with knowledge of the issues. Even when the site is back online, many customers have not been able to sign in to their accounts — or have logged in only to find information missing. For others, access to the system has been slow, requiring repeated tries to get in. The problems come as the Trump administration’s cost-cutting team, led by Elon Musk, has imposed a downsizing that’s led to 7,000 job cuts and is preparing to push out thousands more employees at an agency that serves 73 million Americans. The new demands from Musk’s U.S. DOGE Service include a 50 percent cut to the technology division responsible for the website and other electronic access. Many of the network outages appear to be caused by an expanded fraud check system imposed by the DOGE team, current and former officials said. The technology staff did not test the new software against a high volume of users to see if the servers could handle the rush, these officials said.” [Washington Post, 2025-04-07]
Debt Distress
Bloomberg: Following The Announcement Of The Tariffs, $43 Billion In Loans And Bonds Reached A Distress Level, The Most In 15 Months. According to Bloomberg, “Donald Trump’s global trade war is already priming financial markets for the next wave of corporate defaults. A Bloomberg News measure of distressed debt worldwide swelled the most in at least 15 months this week, sending more than $43 billion of bonds and loans to levels that make it challenging to refinance.” [Bloomberg, 2025-04-05]
April 2025: For The First Time Since August 2024, More Distressed Debt Was In The Americas Than Asia-Pacific. [Bloomberg, 2025-04-05]