The Year Ahead: Tariffs, AI and Fed Independence

0:00Hello, I'm Stephen Carroll. I'm in Brussels where many of Europe's biggest decisions get made. And I'm Caroline Hepker in London with the hosts of the Bloomberg Daybreak Europe podcast. We're up early every weekday keeping an eye on what's happening across Europe and around the world. We do it early so the news is fresh, not recycled and so you know what actually matters as the day gets going. From Brussels, I'm following the politics, policy and the people shaping the European Union right now. And from London, I'm looking at what all that means for markets, money and the wider economy. We've got reporters across Europe and around the globe feeding in as stories break So whether it's geopolitics, energy, tech or markets you're hearing it while it happens It's smart, calm and to the point And it fits into your morning You can find new episodes of the Bloomberg Daybreak Europe podcast by 7am in Dublin or 8am in Brussels, Berlin and Paris On Apple, Spotify, YouTube or wherever you get your podcasts

1:02Bloomberg Audio Studios. Podcasts, radio, news. Maybe that will be the story for the global economy in 2026. Yes, the risks are there, but actually it's the momentum and the optimism and the AI revolution which continue to dominate the narrative.

1:32I'm Stephanie Flanders, Head of Government and Economics at Bloomberg, and this is Trumponomics, the podcast that looks at the economic world of Donald Trump, how he's already shaped the global economy, and what on earth is going to happen next.

1:48And this week, it's a traditional Trumponomic look ahead to 2026. As we look forward, I hope, to the holidays, I wanted to take a deep breath and think a little bit about what's happened in the past year and a lot about what it means for the year ahead. And the Christmas bundle I've selected to help me with this, and I hope provide just the right amount of illumination, are in Washington, Mario Parker, our managing editor for US Politics, amazingly joining Trumponomics for the first time. Mario, hello. I am very happy to be here. Thank you. Also in Washington, frequent visitor to the pod, Tom Orlick, chief economist for Bloomberg Economics.

2:25Great to be here, Stephanie. And in London, welcome back, Parmy Olson, a Bloomberg Opinion columnist covering technology whose book, Supremacy, AI, ChatGPT and the Race that Will Change the World, was the FT's Business Book of the Year for 2024. Parmy, welcome back. Thank you for having me.

2:49I mean I wanted the three of you for various reasons some of them pretty obvious you've been right at the heart of the action this year and I find you always wise about what's to come so the way we always start these things or I like to start is just for each of us to think what was the most memorable moment of this year. So, Mario, I'll put you on the spot. What was the most memorable moment for you? I think it was specific to this podcast very much, which was the Liberation Day rollout, where it started, there were fits and starts, there were problems with the White House's copying machine, there were typographical errors on some of the cards, and there was just a lot of confusion.

3:34And I think that set the stage for what we saw with both the tariff rollout and the way and the many things that the administration promised that did not quite come to fruition, but also the fast pace and the chaos that we've seen wrought by the administration, deliberately so, where they want to move fast and quote unquote break things. And we've seen that throughout the rest of the year. So that was the most memorable moment, I think. Tom? So there was a moment just before the US made that fateful decision to join Israel in attacking Iran's nuclear facilities. And there was still intense speculation about whether Operation Midnight Hammer, as it was called, would go ahead or not.

4:17And President Trump took to Truth Social and said, I may do it. I may not do it. Only I will decide. And I expect everyone else is way ahead of me on this. But for me, that was a real clarifying moment, right? And it clarified that the intense uncertainty, the kind of presidency as a soap opera with a cliffhanger at the end of every episode to keep you tuning in the next day, that wasn't a bug of some of the trade policies and security policies we'd seen in the previous few months. It was a feature, a deliberate strategy to allow the president to very successfully dominate the conversation, dominate the headlines, keep himself at the front of everyone's consciousness.

5:05Pami? Well, the highlight for me was actually at the very beginning of this year in January when a little company in China called DeepSeek released an AI model that caused a freakout in Silicon Valley. This was an AI model that was as good as ChatGPT but developed for what apparently was a fraction of the price. And it was an open model. Some would call it open source. So they essentially put the blueprints of this AI model on the Internet for anybody to develop on themselves. And I thought it was just such an interesting twist on this effort by the Trump administration and previous White Houses before to restrict chip exports to China to try and ensure that the U.S.

5:49would stay ahead on tech. And yet the constraint bred innovation, the lack of chips, led this one company to try and do more with less. And since then, DeepSeek isn't quite as popular as I would have thought it would be by this point in time. But other Chinese open source models are becoming much more popular, in particular Alibaba's Quen. So lots of Silicon Valley startups are using models from China now. And I think that's just such an interesting highlight for this ascendancy we're seeing from China, both in AI and also in robotics. And it's funny, Pomi, because yours slightly relates to one of mine.

6:29And if I'm completely honest, if I think of what was the most memorable, I think watching in the office and watching in real time the feed coming in of that Zelensky, the sort of car crash Zelensky session in the White House with the president. The visceral reaction we all had of, oh, my God, this is really very bad. But if I think about what was the most eye opening, it was when we'd all been completely focused on the U.S. and I went to a sort of reasonably high level senior people involved in global business, some of them based in Hong Kong, but others in US. And I asked them on this panel, you know, what's the thing that surprised you so far this year, assuming they would all talk about Donald Trump.

7:10Every single one of them pointed to a technological advance that they'd been surprised that China had made, whether it was in electric vehicles or I'm sure a couple of them were talking about DeepSeek. And it just sort of made me think, ah, maybe China's just going to win this, even as we spend an awful lot of time watching every move coming out of the White House. So Tom, partly because of that, how the rest of the world has absorbed and responded to Trumponomics has obviously been a big theme for the year. The big surprise being that countries in many ways, almost all of them apart from China, did not retaliate to the tariffs.

7:45And that has had its own consequences. But how do you see the global ramifications of Mr. Trump's economic policies playing out now in 2026? We've had stage one. What's stage two going to look like? So I think if we think about trade, if we think about security, if we think about AI, if we think about the Fed, the 2025 story isn't over, right? The consequences are still going to be playing out in 2026. On trade, I think one of the surprises is that we've not seen this enormous hike in tariffs playing out immediately in higher prices for US consumers and lower profits for US businesses. But I think that pass through of tariffs to the rest of the economy, higher prices at the shops, lower margins for US businesses, potentially a hit to US stocks, That's still something that will play out in the early months of 2026.

8:45If we think about security, I think one of the big things we're looking for in 2026 is resolution of that terrible ongoing conflict in Ukraine. If we think about the situation right now, well, it seems like that resolution could be on terms which are very favorable to Moscow. And that's something which has significant economic consequences. We're already seeing Germany and other European nations responding with a significant increase in their defense spending. Good news for growth, good news for defense stocks, bad news for countries already struggling under a heavy burden of debt. On AI, well, one of the good news stories in 2025 was just the enormous optimism about AI, and I'm sure we'll hear more about that from Parmy later.

9:33Big question for 2026, is that optimism going to be sustained? And on central banks, well, huge challenges to Fed independence in 2025. In 2026, Trump's going to be able to pick the chair of the Federal Reserve. And I think probably all of those things we're going to end up touching on. If I just think about China, because that was such a focus of the administration's attention at the start of the year and has been such a dominant theme. If you sort of look back, is China stronger or weaker economically going into 2026 as a result of Trumponomics? So I think about it on a couple of dimensions, Stephanie.

10:15The first one is how hawkish on China is Donald Trump? And it's actually quite hard to answer that question. In one respect, he's America's biggest China hawk until he descended that golden escalator to start his presidential bid in 2016. the view in Washington DC was, yeah, there's some problems with China, we've got some issues, but we can work together. And it was Trump who was responsible for that enormous pivot, that big reorientation saying, actually, China's not our friend, not someone we're going to work with. China's our rival and our adversary. But if you look at the details of China policy right now, well, tariffs have come down, controls on China's access to the chips which power the AI revolution have been relaxed.

11:01Apparently, Trump got on the phone with Japan's Prime Minister Takeuchi and said, cool it on Taiwan. You don't want to upset President Xi, right? So the big reorientation starting in 2016, that positions Trump as an enormous China hawk. The details of policy in the last few months, a bit less hawkish. I think the other big question for China, the other dimension I would think about this is kind of short-term, long-term. So short term, China's facing a crisis in its property sector, collapse in real estate, the consequences of years of overbuilding. And when you've got weak domestic demand, what you really want is strong global demand, strong exports to keep your economy going.

11:44Clearly facing new high tariffs from the United States is not very constructive. Longer term, though, there's a narrative in China that democracy plus capitalism doesn't work. Democracy plus capitalism ends, if you're going to be generous, in plutocracy, if you're going to be less generous, in kleptocracy. And I think when Beijing looks at what's happening in Washington, D.C., that's very much their understanding of how things are playing out. And I think long term, they think that can only be positive for China and China's emergence as a global power. I mean, there was quite a lot of focus just in the weeks leading up to the end of the year on trade surplus still being enormous in China and having quite successfully diverted a lot of exports that are not going to the US to other parts of the world.

12:34Pami, we're going to get into the relative strength, I would suggest, of the US economy this year. Some pain may be still to come. But I think there's a general feeling that the impact of AI investment has been a big part of that, supporting the economy and indeed just making it hard to read the economy. Do you see that level of capex, as Tom talked about, continuing next year? And as we see this rollout of AI, what are the potential bear traps there waiting down the road for the administration or the economy? Well, I think you're absolutely right. In a lot of ways, the AI boom has given the Trump administration a lot of cover because it's just made it look like everything is going so well.

13:17And in aggregate, the Magnificent Seven tech stocks have seen their market valuations increase by trillions of dollars just in the last three years since ChatGPT came out. I personally think there is going to be some kind of correction in 2026. And for all the reasons that people are saying, which is that there is very high risk of near-term monetization not happening. In other words, there's been this huge buildout of infrastructure anticipating all this demand that probably will come in eventually, but it's just not going to come in fast enough to meet the expectations of investors. And this is exactly why we saw booms and bust in the dot-com era, early 2000s.

14:04You had this big rollout of fiber optic cables that eventually got used but just didn't get used quickly enough. Same with the railroads in the 19th century. I think we'll just see perhaps that the sparks will be leaked reports from OpenAI showing a kind of soft demand for their enterprise AI products or something in the earnings reports from Microsoft or Google or Amazon AWS just showing that it's actually been quite difficult to get businesses to adopt these AI services because that's where all the money is. Right now, the huge success of generative AI is consumer-based. You've got 900 million people.

14:41That's about 10 % of the global population is using chat GPT every week. Every week, that's astoundingly successful from a market dominance perspective, but it's not really making money from open AI because very few of those people are paying subscriptions. The real money is going to come when businesses start paying for that access to that service. And that's just taking longer than these companies need. So the more signals we get of that lack of demand, which I guess will happen next year, the more likely we'll have some kind of decline in the markets. But I do think ultimately, it could work out quite well for the biggest tech companies because they're the ones that can weather the storm.

15:22They're so well capitalized. It's the startups and the smaller companies who will really struggle, who will see their valuations fall. And then here comes an opportunity for big tech firms to acquihire those companies or buy those companies, acquire all their talent and IP, and just become even stronger out of all of this. And that's a very good point. In your book, your award-winning book, you chart the history of that crucial bits of the AI revolution. And I think in the process, we're reporting very closely on the individuals in the industry. And of course, the tech bros are unusually close, or at least people who have the back of the AI industry and these big tech companies are very close to the White House and sort of famously have the ear of the president.

16:08Some of the kind of inconsistencies in China policy that Tom mentioned is a reflection of that. The decision to allow NVIDIA to sell some of these more advanced chips to China. If we start to see, Parmi, that AI costing jobs or being associated with other social ills like we've already seen with social media, if it starts being associated with higher electricity costs for a lot of people as they roll out these data processing centers, is there nervousness in Silicon Valley about the kind of political exposure they have now? I mean, it's great to be influencing policy, but it then means they're a bit more implicated.

16:47I suppose. But what choice do they have? I think right now their view is this is the strategy that has worked till now, which is to lobby as hard as you can to try and prevent any other regulations from coming down the pipeline that are going to affect you. So that approach seems to be working. The Trump administration, as soon as Trump got into power, he rescinded the executive order that Biden had put in place on AI that calls on tech companies to do some very basic stuff around auditing of their algorithms. That was scrapped. And now there's, of course, talk of trying to prevent states from implementing their own AI rules because that might create this kind of patchwork effect of regulation that will hinder innovation.

17:36I personally find that completely exaggerated and overblown. That has not been an issue in the past with privacy laws. Usually companies will find the state with the strictest law like California, and then they'll just implement that across the board. It's very workable. So I think this kind of narrative spun by large companies around, if you regulate us, you will hinder innovation for everyone. And we see this in Europe as well. It's just not true, but somehow it has really taken hold. In Europe, the real issue is we just don't have enough funding on this side of the pond for tech startups. The issue is not regulation.

18:15The real problem is there's a real vacuum of thoughtful, specific regulation, rules and standards that are going to govern how this incredibly transformative technology that's addictive for some people, that is actually affecting people's mental health already. There are no rules out there to govern how that is used.

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19:48Mario, you've been nodding very patiently through some of this. I mean, clearly the buzzword as we end 2025, at least in sort of politically, has been affordability. and there is a bit of a read across from this AI discussion and I know people who are being told that the big increase in electricity supply that's going to be needed for their area which everyone knows is due to data processing centers and big tech companies, at least everyone in that area knows is going to double or sometimes even triple their electricity costs. Is that going to be one of the things that could continue to stoke questions about affordability and cost of living?

20:28Absolutely. And I was nodding with just the comments that you all have been making just because I see the through line of it all politically. Right. So as Parmi kind of mentioned or alluded to, you saw the influence of the tech sector on display last week two ways. Right. With the easing the restrictions on NVIDIA's H200, the chips. But then also Donald Trump, I mean, almost verbatim repeated the rationale for AI not being having a patchwork with the states and that it would inhibit the innovation of the industry as well. But also the sugar high, right, that it provides in an economy that Americans are pretty sour on and giving Trump pretty bad marks, the sugar high, that one bright spot is that aides are showing the president the proliferation of data centers, building the data centers across the country.

21:21And he sees that as a win, appealing to his sense of that the U.S. can lead the way with this breaking edge, this cutting edge technology as well. Now, the other part of that coin is the fact that it leaves him vulnerable, he and the party vulnerable to arguments about affordability. Even as he touts lower energy costs for gasoline, etc., electricity prices have skyrocketed. And we saw that play out in some of the elections that we saw in November, where Republicans lost pretty handily in several places and affordability became a salient issue. and electricity prices became a salient issue. The other part of it politically is, as you all have both alluded to, Americans still don't quite understand all of the nuances of AI.

22:13The administration hasn't been able to, or the industry, explain it in a way that common Americans can really grasp it. They see it as something that's fun. They see it as something that can be confusing. They see it as something that could be toxic to mental health at times. They see it as a threat to their livelihoods and jobs, right? And then you add on the affordability issue as well. And so we'll see that continue to play out in 2026. The president has been on something of an affordability tour, quite a few big events on this. And yet it's not clear what levers he's going to pull, because in some ways he doesn't recognize that there is an affordability crisis.

22:55As we go into the midterms, how crucial is that going to be? And do you think that there's going to be actual moves by the administration, more direct efforts? Or is the White House going to still feel like this is really just about messaging more than substance? I think a little bit of both, right? I think the problem for the White House is the fact that Donald Trump, going back to our interview with him in summer of 2024, has looked at tariffs and argued that tariffs don't have a material effect on consumer prices. Well, what you've seen over the last month and change or so is some of the reversals on food stuffs, right?

23:33Bananas, coffee as well. So you see the administration also trying to pull levers on things like beef. So it's an acknowledgement in some ways that tariffs are having this additive of cost to the consumer from the administration, even as Trump has argued. So you've got this discordant message coming from the administration. And quite frankly, if anyone saw the president's speech, the rally, his heart just wasn't into this affordability message. I mean, he all but said that his chief of staff, Susie Wiles, told him, you need to go out here and campaign on this. So it almost sounded like someone who was grudgingly told you got to go outside and do something that you really don't want to do.

24:16It's convenient for the purposes of this podcast to feel that the economy is central to everything. We should step back and ask, what is the state of the US economy going into 26? I mean, I know many of us, certainly a year ago, if we'd been told what the administration was going to do, what was going to happen in terms of tariffs and uncertainty and other things, we probably would not have expected it to be as strong or inflation to be as low. But what does it look like now? And what are you watching going into 26 on just the strength of the economy? So I think there's quite a lot to be optimistic about on the US economy heading into 2026.

24:52Inflation's a bit higher than the Fed would like it to be, but it's certainly not spiraling higher. Growth, pretty robust. Looking into 2026, we've got easier monetary conditions. The Fed is cutting interest rates. We think they're going to be cutting quite a lot more in the year ahead. we've got supportive fiscal policy, the one big, beautiful bill cutting taxes for big US businesses. We've got a bonfire of regulations. We can argue about whether or not that's socially optimum or not, but certainly it sparks animal spirits. And of course, we've got the AI revolution and all that means for market optimism and for capital spending.

25:35So if you put all of those things together. I think the base case for US growth in 2026, US growth heading towards the midterms, is pretty optimistic. There's stuff that could go wrong. AI optimism could evaporate. A new Fed chair could potentially overplay their hand, bringing concerns about lost Fed independence back into perspective, pushing interest rates higher. So some risks there, but the base case heading into 2026, I think pretty optimistic. Well, you mentioned the Fed, and obviously the independence of the Fed has been a great focus. There's been this kind of horse race around who was going to be named by the president as the new chairman of the Fed.

26:22The betting, as we're recording this, is still on Kevin Hassett, but there's been some desire from the White House to still preserve the element of surprise. But that's a power that the president has always had. But there is uncertainty about whether the president also has the power to fire members of the Fed board. I mean, Mario, there's some pretty crucial Supreme Court decisions coming down the track, and that's one of them. Yes, absolutely. One of the cases stems around 1930s era law that prohibited presidents from firing people on independent branches of government. This one is an FTC case that we're quite eager to get the results of.

27:01But the Supreme Court is already signaling that it will likely side with the president. Another extraordinary expansion of executive authority that we've seen. Another case, obviously, is the president's use of IEPA in order to enact some of the tariffs. He's characterized that as essentially make or break for the country. We'll see whether or not the Supreme Court sides with him or not. But make no question about it. Well, we've seen this Supreme Court just grant the president just an enormous amount of executive leeway here. Tom, there's the Lisa Cook judgment. There's been some question about whether or not there will be a line drawn between the Fed and other independent agencies, so-called independent agencies, where the Supreme Court appears set to say that the president can kind of do what he wants with almost all the agencies.

27:55but they have suggested earlier in the year that the Federal Reserve had a slightly different status, which might affect whether they ruled differently in the case of Lisa Cook, which we've talked about before on this program. But how important is that, do you think, in terms of the way the Fed is viewed? Because at the moment, obviously, the markets seem to be quite relaxed about the pressure that the White House is putting on the central bank. So a few years ago, we talked about the twilight of the economic idols, right? Kind of slightly grandiose term, can't remember who came up with it. But the idea was, well, the populists have smashed down the door of so many institutions, right?