UKRAINE
Statements from senior Trump administration officials, including the president himself, set the expectation that Ukraine will not be protected by the NATO security umbrella and that the U.S. military will not provide troops for a peacekeeping force. Experts estimate that European nations will need to spend $3.1 trillion over the next 10 years to rebuild Ukraine and provide a European-only credible deterrent to further Russian aggression. European government bond yields rose, as did European defense stocks.
Our Take: This sudden rearrangement of security measures for Europe will necessitate significant new borrowing and a redirection of fiscal priorities away from the welfare state and towards defense. Such sudden changes are likely to drive further volatility in European capital markets.
TARIFFS
The Trump administration has threatened significant new tariffs on many nations with the guiding principle seeming to be reducing any trade deficits. Such a policy will mean much broader and higher tariffs than previously thought.
Our Take: Sudden implementation of such significant trade policy changes will likely impact inflation, growth and labor markets. Outcomes could be more extreme depending on the tariffs that are actually implemented.
FOMC MEETINGS
This week, the Fed released the minutes from the January FOMC (Federal Open Market Committee) meeting. The minutes show an increased level of uncertainty within the Fed regarding the impact of changes in fiscal policy with the new administration. Some policies have “the potential to hinder the disinflation process, including the effect of potential changes in trade and immigration policy.” Other polices are a potential source of economic growth, including “an easing in government regulation or changes in tax policies.” Overall, most participants judged that the risks to achieving the Fed’s employment and inflation goals are “roughly in balance.”
Our Take: Given the uncertainty at the Fed, it is no surprise policymakers kept rates unchanged. The Fed remains focused on a careful, data-driven approach to policy normalization and appears willing to hold its target rate steady as it assesses the impact of fiscal policy.
MUNICIPALS
Wisconsin Governor Tony Evers released his budget proposal for 2025-2027. The $55.5 billion plan calls for an 18% increase in spending. Evers proposed $3.15 billion for K-12 schools along with $856 million for the Universities of Wisconsin and a $480 million childcare subsidy. Evers’ plan also includes $2 billion in tax cuts, while increasing taxes on high earners. Republican leaders have indicated that most of the budget proposal would be “dead on arrival” and criticized the spending increases.
Our Take: Lawmakers, along with the governor, will continue to hash out the details of the 2025-2027 budget over the next few months. Currently, Wisconsin finds itself in a healthy fiscal position. Projections show that Wisconsin is expected to have a $4.3 billion surplus due to higher-than-expected state tax revenues. Wisconsin also has $1.9 billion in its rainy-day fund.