Chicago Boycotts America Amid Economic Turmoil

Happy Friday! This is your weekly wrap-up, reflecting on a week filled with economic news ranging from institutional setbacks to market challenges.

The Federal Reserve has revealed that its choice to keep interest rates steady is based on a significant theoretical misunderstanding. Italian pasta manufacturers have indicated that tariffs are likely to depress demand instead of driving up prices. Additionally, the recent government shutdown has obscured important economic data that could have tested the Fed’s forecasts. Meanwhile, some Chicago politicians are misusing taxpayer retirement funds for political campaigns while shunning safer investment options.

Questionable Economic Theories

For those who stake their beliefs on economic theory, it’s been a revealing week. The Fed should perhaps reconsider its own findings before making economic decisions that impact everyone’s mortgages. Jerome Powell, the central bank’s leader, has spent a lot of time this year justifying the Fed’s reluctance to lower rates, claiming tariffs would result in further “tariff inflation.”

A recent study from the San Francisco Fed examined tariff policies from 1870 to 2020 across the U.S., U.K., and France. The conclusion? When tariffs rise, inflation tends to fall. In fact, a 4 percentage point increase in tariffs correlated with about a 2 percentage point drop in inflation, alongside a rise in unemployment.

This isn’t just a slight correlation. It’s consistent across historical periods, including pre-1913, between the wars, and post-World War II. Higher tariffs seem to lead to lower prices and diminished economic activity.

It’s not pushing prices up; it looks like it’s pushing them down.

The rationale Powell provided for maintaining interest rates—protecting consumers from tariff-induced inflation—was apparently grounded in misunderstandings that his own institution’s research now contradicts. Oops!

Evidence in the Pasta Aisle

Need evidence that tariffs don’t necessarily hike consumer prices? Look no further than Italian pasta.

With tariffs exceeding 107%, including hefty anti-dumping duties, Italian pasta producers like La Molisana are considering exiting the U.S. market rather than raising prices. CEO Giuseppe Ferro bluntly stated, “No one has that luxury.”

This suggests that tariffs simply can’t be passed on to consumers, and even importers aren’t absorbing the costs.

For the record, the steep tariffs aren’t solely a result of Trump’s EU policies; they stem from anti-dumping measures that would have applied regardless of the administration.

Data Void from the Shutdown

The recent government shutdown lasted six weeks—the longest in U.S. history—and crucially, it coincided with the data collection period for consumer price indexes and employment stats for October. This isn’t merely a delay; there was no data collection at all.

Surveys by the Bureau of Labor Statistics rely on households’ reporting on employment and spending at specific times, but once those moments pass, you can’t go back to gather information.

Now, we find ourselves in an odd situation where the Fed chair has decided to keep interest rates unchanged based on fears of tariff inflation without having the economic data needed to confirm those fears. It’s possible that the October CPI will be nonexistent, and the jobs report may vanish into bureaucratic limbo.

As noted by Caroline Levitt, the Fed is “acting blindly at a critical time,” meaning Powell might have made a serious error in monetary policy based on faulty theories, with data that might not surface in time.

Upcoming Supreme Court Arguments

This week, the Supreme Court is set to hear arguments regarding whether Trump can terminate Federal Reserve President Lisa Cook.

Cook has been in limbo since August, when Trump urged a halt to the investigation into her over allegations of mortgage fraud, which she has denied. The court’s timing for the case appears to occupy the last day of the January session, sparking speculation about its implications for central banks.

There might be more complexity at play here. The Court may reconsider a precedent that currently protects agency heads from arbitrary removal. If they decide to overturn it, Cook could be removed with much more ease.

Chicago’s Treasury Secretary Boycotts America

Chicago City Treasurer Melissa Conyers Irvin announced she has mandated her office to boycott investments in U.S. Treasury securities—not as a financial strategy, but as a protest against Trump, whom she perceives as authoritarian.

While she has full rights to her opinion on Trump, it’s important to note that the city currently holds no Treasury securities. In the past, Chicago possessed over $200 million in government bonds, but that’s no longer the case. So, it amounts to a boycott of something they’re not engaging with.

So, what are Chicago’s investment plans if they won’t buy Treasury bonds due to political views? Conyers Irvin argues that her office can still achieve similar profits through options like corporate bonds or asset-backed securities. This suggests a long-standing approach to corporate America to address grievances related to Trump’s actions.

And coincidentally, she is currently campaigning for a seat in Congress. Naturally.

Honoring a Historical Milestone

This Sunday, we mark the 493rd anniversary of Spanish explorer Francisco Pizarro’s encounter with the Incas. This clash led to significant shifts in South American civilization, resulting in the emergence of modern nations including Peru, Bolivia, Ecuador, and more.

Pizarro can be viewed as a founding father of South America. Such milestones prompt reflections on how power dynamics evolve and established orders dissolve. Today, however, it seems this particular anniversary is not one that polite society celebrates.

Have a great weekend!