Jamie Dettmer serves as the opinion editor at POLITICO Europe.
WASHINGTON — Recent developments indicate that U.S. President Donald Trump is not the omnipotent figure he often portrays. The real power lies with the bond vigilantes, hedge fund managers, and high financiers, who made their discontent clear last week, prompting Trump to suspend his controversial policy on “reciprocal tariffs.” Despite this, he has retained a sweeping 10 percent global tariff on all imports to the U.S.
The future of this tariff pause, especially concerning China, is uncertain and likely remains unclear even to Trump. As former National Security Adviser John Bolton recently pointed out, Trump’s approach is often “transactional, ad hoc, episodic” and unpredictable.
Investors, who have been unloading U.S. debt and demanding higher premiums for U.S. Treasuries, played a crucial role in pushing Trump towards a more sensible stance. The declining stock market, however, seemed to have little effect on him, as his senior trade adviser Kevin Hassett called it “no big deal.”
Yet, the rising borrowing costs have forced the heavily indebted U.S. government to reconsider its position. The question remains: will this be sufficient to prevent a repeat of these circumstances in the future?
The tumult in the markets triggered by Trump’s “Liberation Day” tariffs was reminiscent of British former Chancellor Kwasi Kwarteng’s disastrous mini-budget in 2022, which similarly destabilized the U.K. economy. Kwarteng, in a television interview, noted that like himself and then-Prime Minister Liz Truss, Trump too was held accountable by the bond vigilantes.
He remarked, “The bond market, as was the case in my and Liz Truss’s experience, was critical. I don’t think [Trump] really minds about the stock markets in the way that he would about the bond market, as it directly impacts the government’s ability to borrow and influences mortgage rates in the U.S., which will affect his base.”
In the U.K., the disapproval from financial markets forced Truss to resign after just 44 days in office. Trump, however, remains in power for another four years unless Congress decides to impeach him again, which seems unlikely before the midterms.
Can the bond vigilantes effectively deter the U.S. president from repeating his tariff strategies? It remains ambiguous.
Trump is often seen as a lawless president, characterized by a blatant disregard for norms and rules. Citing the infamous mobster Oz from the television series “The Penguin,” it raises the question: “How is anyone supposed to know your worth unless you tell ’em?” While the bond vigilantes may not agree with Trump’s valuation approach, it doesn’t mean he won’t persist in trying to assert his perspective.
Consider his recent extraordinary comments to a congressional Republican audience: “These countries are calling us up, kissing my ass. They are. They are dying to make a deal. ‘Please, please, sir, make a deal. I’ll do anything. I’ll do anything, sir.’” Such statements echo the tone of the fictional character Oz.
It is evident that bond markets remain skeptical of Trump following his retreat. They perceive chaos, inconsistency, and erratic policy changes. They observe a divided economic team, unable to agree on whether tariffs serve to reduce deficits, replace income taxes, or act as a negotiating tactic for trade concessions. Often, Trump’s own comments undermine his team’s efforts, contradicting them in real-time, and failing to recognize that reshoring will require significant time.
The bond markets are wary of reversals and the potential dismantling of a rules-based order that the U.S. has traditionally upheld. Additionally, the ongoing trade war with China offers little resolution, with China positioned to endure the standoff better. Even after Trump’s concession, the markets continue to demand higher premiums for buying Treasuries, prompting financial advisors to recommend investments in Europe or Asia instead.
Beyond the bond vigilantes, the only other force that may deter Trump from continuing his previous policies is the electorate. Even with a complacent Congress, where many Republican members have largely embraced Trump’s cult of personality, there may be a shift if they fear repercussions in the upcoming midterm elections.
If voters decide they can no longer tolerate the economic turmoil, it could resonate with Trump, especially considering his stated ambitions to possibly defy the 22nd amendment and seek a third term. Recently, he claimed there are “methods” to achieve this, asserting he was not joking, and he even declined to confirm he would vacate the White House after his second term concludes in 2029.
So, how do voters perceive Trump at this juncture?
Recent polls indicate that his popularity is waning. A YouGov poll revealed that 51 percent of Americans disapprove of his job performance while only 43 percent approve, resulting in a net approval of -8. Discontent regarding his management of the economy is also rising, with a net approval of -10; and in terms of inflation and pricing, he stands at a net approval of -19, a decline from -8.
However, if you anticipate a change of heart driven by the electorate soon, note that Trump’s base remains loyal, with 66 percent of his 2024 voters approving of his economic approach. Despite market volatility, 57 percent of Republican voters support his tariff strategy, with that figure soaring to 74 percent among self-identified MAGA Republicans.
With the 10 percent blanket tariff still active and the U.S. dollar depreciating by 10 percent against a basket of global currencies since Trump took office, consumer prices are bound to rise. His proposed tax cuts will likely not alleviate these increases, which explains his decision to exempt smartphones, computers, and certain electronics from reciprocal tariffs recently.
As prices and mortgage rates inevitably rise due to his tariff policies, it remains to be seen if Trump’s MAGA base will begin to erode.
