Congressional fiscal regulators warned that Wall Street construction triggered by President Donald Trump's trade war could be a "turning point" on the willingness of foreign investors to hold U.S. assets.
“Even if we get rid of April’s volatility, people still leave memories,” Phillip Swagel, director of the Congressional Budget Office, told the Financial Times. “What we are trying to figure out is that when global investors look at the United States, they continue to hesitate.”
Trump's "Liberation Day" tariff announcement on April 2 caused acute volatility in U.S. government debt and stock markets, with the S&P 500 falling by as much as 15%, and borrowing costs soaring.
Markets stabilized after Trump stopped most of the steep "reciprocity" taxation, but feared that the president's policy shift could spark foreign investors' enthusiasm for U.S. assets. In recent years, stocks have particularly outpaced global market performance, prompting international investors to occupy a large position.
Swagger said international investors were eager to shovel U.S. assets “support U.S. growth, support jobs” and promote the government’s ability to fund the country’s massive budget deficits and sell U.S. government debt.
The CBO will conduct a series of 10-year growth and fiscal forecasts over the summer, which will conduct the first comprehensive assessment of the Trump administration’s economic agenda amid concerns abound.
The CBO director said he has not yet determined whether the sell-off of U.S. assets and the selling price of April 2 tariffs will have lasting effects, saying hard data has provided few clues so far.
"Will we see it as a transformation point that really leads to major changes in the global economy and a reduction in the role of the United States? Or is it a turbulent plot that is overcome by other policies that improve growth (such as tax cuts and deregulation) and more stable?" he said.
The United States has reached its first deal this week since Trump launched the trade war. However, investors remain concerned about Washington's ability to reach deals with other large trading partners such as China. They are also waiting to see the president's other flagship policies, including calls for tax cuts and deregulation.
"It's natural to consider tariffs given April volatility, but there are many other aspects of the U.S. economy. It could be that tariffs are partially stable and then the government makes progress in other areas," the CBO director said. "That would be a positive result. Or we can go back and say that it's the beginning of a period of slower growth."
"The hesitation of global investors in investing capital into the United States, even rebalancing in a way that reduces interest in U.S. securities is part of a series of concerns," Swager said.
At the IMF and the World Bank spring meeting held this year, senior financial officials in global finance, many of which represent countries holding large dollar reserves, were “really the most negative I remember”.
He added: "Since then, my feeling is that emotions have gone from being super negative to being more waiting and seeing. So it's an improvement."
The Trump administration acknowledges the "short-term pain" of tariffs, but believes that bringing manufacturing home is worth the effort. It also touts the potential of taxes to increase revenue and reduce federal deficits.
Finance Secretary Scott Bessent plans to reduce the deficit from 6.4% in 2024 to 3% at the end of the president's second term.
Swager said the finance minister could achieve his goal “of course it is possible”. "The combination of strong growth and spending constraints can reduce the deficit. How much depends on the details."
The CBO is awaiting the passage of a key budget measure, known as the “reconciliation” bill, to assess the impact of the new administration before setting the summer forecast.
Its previous outlook, published in March, showed U.S. debt after World War II highs later this decade.
"We just have to wait and see," Swager said, and his forecast also depends on the road to interest rates and what Elon Musk calls the "government efficiency ministry."
The bill Trump hopes to pass on July 4. Becente said Friday that Congress needs to take action by mid-July or could breach the debt ceiling by August.
The bill will include measures to impose tax cuts during Trump’s first term perpetuity – the U.S. Congress said the bill would add 6 tons to the deficit over the next 10 years.
The CBO said that a 10% blanket tariff would reduce the deficit by $220 million over the next 10 years. However, higher fees do not necessarily increase income through the corresponding amount.
“From a general tariff of 10% to 20%, revenues don’t increase 1 to 1,” he said. “At some point, if high tariffs continue, these tariffs will have a wider economic impact.”