As Fed declares surrender, California sues Trump over illegal tariffs

(Originally published April 17 in “What in the World“) Stocks fell sharply after U.S. Federal Reserve Chair Jerome Powell repeated his warning that Trump’s tariffs are raising the risk of stagflation.

“The level of the tariff increases announced so far is significantly larger than anticipated,” Powell told a meeting of the Economic Club of Chicago. “The same is likely to be true of the economic effects, which will include higher inflation and slower growth.” Powell conceded that the situation essentially paralyzes the Fed, rendering it unable to lower rates to help the economy without fueling inflation, yet unable to fight inflation without hurting growth and jobs. “It’s a difficult place for a central bank to be, in terms of what to do,” he said.

The S&P500 fell more than 2% in response, while the Nasdaq dropped more than 3%. Trump’s tariffs vary bewilderingly depending on country and product, but his minimum 10% on all imports will cost each U.S. household between $1,700 and $2,350 a year. California Governor Gavin Newsom on Wednesday filed a lawsuit against Trump’s administration, arguing that Trump’s use of the International Emergency Economic Powers Act as authority for his tariffs is unlawful.

Monday-morning quarterbacks are emerging to add further perspective on last week’s drama in the U.S. Treasury market. Some are pointing out that, despite the sharp rise in 10-year yields, inflation-adjusted rates for 10-year Treasuries haven’t really risen above a trend higher since 2023.

The Financial Times’ always-sage columnist Martin Wolf brings his characteristic aplomb to the chaos, labeling Trump a tyrant who is killing the economy with arbitrary, despotic moves. Trump, Wolf writes, is an enemy of prosperity. Wolf then lays down a gauntlet: “The world’s challenge is to survive the folly. The US’s is to end it.”