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Why Is CPI Important? Explore its Definition & Impact

The Consumer Price Index (CPI) shows how prices change, showing if things are getting more expensive or if living costs rise. Here's why CPI matters. What is the Consumer Price Index (CPI)? The Consumer Price Index (CPI) is one of the key indicators for measuring inflation. The U.S. CPI is compiled and published by the Bureau of Labor Statistics (BLS). It serves as a critical tool for governments, financial markets, businesses, and consumers to assess inflation trends and overall economic health, guiding decision-making across various sectors. CPI is used to track changes in the prices of goods and services essential for daily life over time, measuring the degree of inflation. It includes everyday expenses such as food, housing, and transportation. Each item's impact varies; for instance, housing expenses typically account for a larger share of household spending and are therefore assigned greater weight in the calculation. View CPI The commonly referenced CPI represents aggregate data, while the highly significant core CPI excludes items with high volatility due to seasonal or external factors—food and energy expenses. This provides a clearer reflection of long-term inflation trends. View Core CPI Analyzing both CPI types together provides a more accurate understanding of economic changes and potential risks. Why Is CPI Important for the Economy? Its Uses and Impacts The Consumer Price Index (CPI) reflects changes in prices and directly impacts everyone’s purchasing power. When the CPI rises, it indicates higher prices, meaning the same amount of money buys less. For instance, if a Big Mac at McDonald's cost $2 last year and the CPI increased by 5%, the price could rise to $2.10, reducing our purchasing power. CPI is also a key reference tool for central banks, governments, and businesses when crafting policies and making decisions. Here are five major impacts of CPI: 1. How CPI influences Interest Rate Policy? Central banks consider multiple indicators to shape monetary policy, balancing price stability and economic growth. CPI is one of the key references! When analyzing CPI, central banks typically focus more on core CPI because it excludes the more volatile items of food and energy, providing a clearer view of long-term economic trends. To maintain economic stability, central banks often set an inflation target (usually 2%). The table below illustrates how CPI and inflation targets influence monetary policy decisions: Interest Rate Decision Based on Index Changes Based on Inflation Target Rate Hike If core CPI rises consistently, the central bank may raise interest rates to combat inflationary pressures. If core CPI exceeds the target, the central bank may hike rates to control inflation. Rate Cut If core CPI grows slowly or declines, the central bank may lower rates to stimulate economic growth. If core CPI falls below the target, the central bank may cut rates to boost the economy. The Federal Reserve (Fed), closely watched worldwide, sets the "federal funds rate target range" to influence market rates and manage the economy and inflation. While U.S. Core PCE Price Index(Personal Consumption Expenditures Price Index) is its primary inflation gauge, core CPI remains an important supplementary indicator. Central banks consider multiple metrics to strike a balance between price stability and economic growth—an ongoing and complex challenge. View Federal Funds Rate 2. How CPI Affects COLA? In the United States, Cost-of-Living Adjustments (COLA) are tied to changes in the CPI. This policy adjusts Social Security Benefits, pensions, and other government assistance to protect retirees and low-income families from the impact of price fluctuations. When the CPI rises, the cost of living increases, and COLA raises benefit amounts to help individuals maintain their purchasing power. Conversely, if the CPI decreases, COLA adjustments may slow or pause, ensuring recipients’ real income remains unaffected by inflation or deflation. 3. How CPI Impacts Wage / Salary Adjustments? The CPI is a key reference for businesses when adjusting wages and serves as a basis for employee salary negotiations. When rising CPI drives up costs of living, companies may consider raising wages in line with CPI increases to maintain employees’ living standards. Additionally, unions or employees often use CPI changes as leverage in salary negotiations to request higher pay. CPI fluctuations can also indirectly influence wage policies through cost pressures or minimum wage regulations. These may include automatic pay adjustments or cost-of-living allowances to offset price increases. 4. How CPI Influences Investment Decisions? For investors, CPI changes serve as a crucial signal, directly influencing asset allocation and reshaping expectations for corporate profitability. Investors must adapt their strategies flexibly based on inflation trends to manage market risks and fluctuations in sentiment. When CPI exceeds expectations, heightened inflationary pressure may lead investors to shift toward inflation-hedging assets like gold and commodities. Conversely, when CPI falls below expectations, equities and growth-focused assets often perform better, driving up asset prices. Related Indicators: COMEX: Gold Futures 5. How CPI Affects the Housing Market and Mortgages? Changes in the CPI can also impact the housing market demand and rent. Since mortgage rates are typically linked to the central bank's benchmark interest rate, when the central bank raises rates, mortgage rates tend to rise, increasing borrowing costs and potentially dampening home-buying demand. Conversely, when the central bank cuts rates, mortgage rates may decrease, allowing borrowers to benefit from lower interest rates and repayment burdens, potentially driving up housing market activity. Landlords also adjust rent levels based on CPI changes, especially in high-inflation environments, where rents often rise to offset increased costs. CPI Data Collection Methods The Consumer Price Index (CPI) is compiled and released by the U.S. Bureau of Labor Statistics (BLS). It reflects changes in the cost of living by surveying household consumption patterns and price changes of goods and services. Here are three key concepts regarding CPI data collection: 1. CPI Compilation The BLS establishes the "CPI market basket" based on the Consumer Expenditure Survey (CE). This basket encompasses eight major categories of household spending, including housing, food and beverages, apparel, transportation, medical care, recreation, education, communication, and other goods and services. The market basket also includes taxes related to everyday consumption, such as sales taxes, but excludes taxes unrelated to daily consumption or investment items. The BLS collects prices of goods and services across the United States. Using the surveyed price data and the proportion of each item in the market basket relative to household expenditures, it defines the weights for CPI calculation. Each year, the market basket and weights are adjusted based on changes in household spending to reflect shifts in actual consumer expenditures. 2. CPI Market Basket & Weights According to the latest data from the December 2023 BLS CPI Market Basket, food items account for 19.26%, energy items for 6.66%, and all items less food and energy for 74.08% (representing Core CPI). The total CPI includes all of these items. (Source: Latest CPI weight data from BLS） Related Indicators: United States: CPI - Energy (SA) United States: CPI - Food United States: Core CPI (SA) United States: CPI (SA) 3. CPI Reference Consumer Groups: CPI-U, CPI-W The U.S. CPI measures two main groups: All Urban Consumers (CPI-U) and Urban Wage Earners and Clerical Workers (CPI-W). These two groups have different market baskets, reflecting the distinct consumption patterns and price changes faced by each population. CPI for All Urban Consumers (CPI-U) CPI-U refers to the price changes experienced by all households living in urban areas across the United States, covering over 90% of the U.S. population. This group represents the consumption patterns of the majority of urban residents, when people refer to the CPI, they are typically referring to CPI-U. CPI for Urban Wage Earners and Clerical Workers (CPI-W) CPI-W measures the price changes experienced by households of wage earners and clerical workers living in urban areas. These households typically have lower or moderate incomes, primarily derived from hourly wages or salaried pay, and represent about 30% of the U.S. population. CPI-W is often used as a basis for adjusting Social Security benefits and other federal welfare programs. View CPI-W Related Indicators: United States: Core CPI-W How is CPI Calculated? Since the composition of household spending varies across different families, the Consumer Price Index (CPI) is not calculated using a simple average. Instead, it assigns weights to each items of goods and services based on their share of household spending and uses a weighted average to ensure the data more accurately reflects real-life expenses. The Bureau of Labor Statistics (BLS) calculates the CPI by determining the weighted average of prices for items in the market basket. Typically, a specific year is chosen as a reference base (known as the base year), and the price index for that year is set at 100. This allows for comparison of price changes over time. For the U.S. CPI, the base period is not a single year but the average of prices from 1982 to 1984, which serves as the standard for comparison. The formula for calculating the CPI is as follows: \[CPI = \frac{{\text{Current period total of goods/services prices}}}{{\text{Base period total of goods/services prices}}} \times 100\] Example: The CPI Market Basket includes apples and bread The base period price of apples is $1, and the current price is $1.2, the weight is 30%. The base period price of bread is $2, and the current price is $2.1, the weight is 70%. Step-by-step calculation: Calculating the base period total (base price × weight): ( $1 × 30% ) + ( $2 × 70% ) = $1.7 Calculating the current period total (current price × weight): ( $1.2 × 30% ) + ( $2.1 × 70% ) = $1.83 Applying the CPI formula: CPI = (1.83 / 1.7) × 100 = 107.65 ➤ This indicates that, compared to the base period, prices have increased by 7.65% in the current period. Limitations of CPI Data The limitations of the Consumer Price Index (CPI) stem from sample selection, regional differences, measurement errors, and its inability to capture all factors affecting the cost of living. Here are the four main limitations of the U.S. CPI: 1. CPI Doesn't Account for All Spending Patterns The CPI is calculated using nationwide average data, but it doesn't fully capture the consumption habits of different groups. This is reflected in several ways: Low-income households tend to spend more on food and housing, while high-income households spend more on entertainment and luxury items. Older retirees have higher medical expenses, and their spending patterns differ from those of other age groups. The CPI mainly reflects consumption patterns in urban areas, and doesn't fully account for differences in rural areas. 2. CPI Doesn't Reflect Regional Price Differences There are significant price differences across U.S. states and cities. For instance, the cost of living in New York and San Francisco is much higher than in other areas. However, the CPI is calculated using nationwide average data, which doesn't accurately reflect price changes in high-cost areas. Additionally, the CPI measures the rate of price changes within regions, not the differences between regions. For example, if New York's CPI rises by 3%, it reflects a faster rate of price increases, not that New York's prices are higher than those of other areas. 3. CPI Cannot Fully Reflect the Real Cost of Living The CPI does not frequently update its basket of goods, so it can't immediately reflect the impact of new products or technological advances on prices. It takes some time for these changes to show up in the CPI. Additionally, the CPI excludes many factors that affect the cost of living, such as changes in income taxes or fluctuations in the investment market, making it difficult to accurately reflect an individual's true cost of living. 4. CPI Is Subject to Sampling Survey Limitations The CPI measures price changes based on a sample of goods, not a comprehensive record of all purchases. This is a natural phenomenon in statistics, not a calculation error. Therefore, the BLS regularly publishes the "CPI Variability Estimates" to provide more accurate data. CPI Release Frequency and Timing The national Consumer Price Index (CPI) is released monthly by the U.S. Bureau of Labor Statistics (BLS), typically between the 10th and 15th of each month, at 8:30 AM Eastern Standard Time (EST), with data reflecting the previous month. Below is the CPI release information for China, the Eurozone, and Japan: Region Publishing Agency Frequency Release Time China CPI National Bureau of Statistics of China Monthly Data for the previous month is released between the 9th and 15th of each month. Japan CPI Statistics Bureau of Japan Monthly Data for the previous month is released in the late part of each month Euro Area CPI Eurostat Monthly Inflation estimates for the previous month are released in the first part of each month, with revised final data (HICP) published later in the month. (Source: Regional release agencies) What’s the Difference Between SA and NSA CPI? Whether seasonally adjusted (SA) or not seasonally adjusted (NSA), the CPI data is based on the same raw data. The choice of which version to use depends primarily on the analytical needs. Item SA CPI NSA CPI Definition Excluding inherent seasonal fluctuations, such as back-to-school season, shopping seasons, and energy prices. Raw data is affected by price fluctuations caused by weather or holidays. Purpose Highlighting long-term price trends. Reflecting actual price levels. Primary Use Macroeconomic analysis and forecasting future prices. Short-term price monitoring, COLA, media reference, and more. Application Scenarios Comparing inflation rates across different years to assess the effectiveness of Fed monetary policy. Economists and financial analysts conducting macroeconomic analysis and forecasting. Comparing food prices for this year’s Thanksgiving with last year’s Thanksgiving. Analyzing the short-term impact of hurricanes on gasoline prices. Related Indicators: United States: CPI (SA) United States: CPI (NSA) Inflation is a global challenge, and understanding the CPI is not just the job of economists. Each of us should pay attention to this indicator to track changes in the cost of living and make better financial decisions. Sign Up to Track Key Indicators

Manufacturing PMI Recap: US, China, EU, Japan & Korea (Latest)

Key manufacturing data from major economies, including the U.S., China, Japan, and the Eurozone, revealed continued divergence in global manufacturing performance in 2025 January. The U.S. manufacturing activity returned to expansion after months of contraction, driven by strong new orders and production, signaling continued demand recovery. In contrast, the Eurozone's contraction showed signs of easing, but weak demand and geopolitical uncertainties kept overall performance subdued. In Asia, China fell back into contraction after three months of expansion due to seasonal Lunar New Year effects and underwhelming policy impact. Japan remained in contraction for the seventh consecutive month, though businesses remained cautiously optimistic about the future. Meanwhile, South Korea returned to expansion, supported by external demand recovery, though domestic economic prospects remain uncertain, with businesses maintaining a cautious outlook on the timing of a full recovery. United States PMI: Demand Returns to Expansion, Sustainability Still in Question The U.S. manufacturing PMI for January stood at 50.9 (prior: 49.2), marking an end to nine consecutive months of contraction and reaching its highest level since September 2022. In the sub-index, the new orders index rose for the fifth consecutive month, climbing to 55.1 (prior: 52.1), while the production index returned to expansion at 52.5 (prior: 49.9), the highest level since March last year. The inventory index declined further to 45.9 (prior: 48.4), and the spread between new orders and customer inventories widened to 8.4 (prior: 5.4). Supplier delivery times increased to 50.9 (prior: 50.1), all indicating an accelerating pace of demand recovery. Company surveys revealed that most businesses reported continued demand improvement, in some cases exceeding previous years' levels. However, some of this rebound may reflect preemptive demand releases ahead of Trump's tariff policies, making the sustainability of expansion a key factor to watch going forward. Read more at Datatrack Euro Area PMI: Contraction Persists but Shows Signs of Easing; Business Optimism at Its Highest Since February 2022 The Eurozone's January Markit PMI came in at 46.6 (prior: 45.1), reflecting a slight easing in contraction across new orders, production, and inventories. However, employment remained weak, with layoffs accelerating and backlog orders continuing to decline, indicating ongoing weak demand. Input prices rose for the first time since August 2023, but businesses refrained from passing costs onto customers, keeping output prices flat and halting four months of consecutive declines. Germany: The January Markit PMI stood at 45.0 (prior: 42.5). Despite challenges from U.S. tariff policies, parliamentary elections, and rising corporate insolvency risks, new orders and production continued to contract but at a slower pace. Employment remained in contraction for the 19th consecutive month, and backlog orders hit a 2.5-year low. However, with lower interest rates and post-election economic stabilization expectations, business sentiment improved significantly, pushing production expectations to a three-year high. France: The January Markit PMI came in at 45.0 (prior: 41.9). Although new orders and production continued to decline, the pace of contraction moderated slightly, with some firms reporting a slight recovery in customer interest. However, businesses continued to reduce procurement activities, preferring to use existing inventories to maintain cash flow. Hiring remained weak, and backlog orders continued to decline, albeit at a slower pace. Business sentiment remained pessimistic due to domestic political instability and concerns over weak demand. Italy: The January Markit PMI stood at 46.3 (prior: 46.2). Weak demand persisted, exacerbated by political instability in Germany and France and concerns over U.S. tariffs, leading to a sharp drop in new orders. However, the negative impact was partially offset by a slower pace of contraction in production, employment, and inventories. Backlog orders continued to decline amid ongoing layoffs, yet firms remained optimistic that political stability in key trading partners would gradually improve. Read more at Datatrack   China PMI: Three-Month Expansion Ends, Urgency for Policy Stimulus Increases China’s January manufacturing PMI stood at 49.1 (prior: 50.1), falling back into contraction and missing market expectations of 50.1. In the sub-index, production fell to 49.8 (prior: 52.1), and new orders declined to 49.2 (prior: 51.0), both returning to contraction due to seasonal Lunar New Year effects. Inventories fell to 47.7 (prior: 48.3), while employment remained in contraction at 48.1. The spread between new orders and customer inventories declined further to 2.7 (prior: 3.1). Historically, January production and new orders typically decline by 0.3–0.8 percentage points due to seasonal factors, but this year, the declines were 2.3 and 1.8 percentage points, respectively, indicating weaker-than-expected policy stimulus effects. Meanwhile, the U.S.-China trade war has re-escalated, further increasing pressure on China’s government to expand fiscal stimulus efforts this year. Read more at Datatrack Japan PMI: Seventh Consecutive Month of Contraction, Business Sentiment at a Two-Year Low Japan’s January manufacturing PMI stood at 48.7 (prior: 49.6), marking its seventh consecutive month of contraction. New orders and production declined further, with surveyed firms reporting continued weakening of customer confidence, particularly in automotive and semiconductor sectors. Although employment expanded for the second month, backlog orders continued to decline rapidly, reflecting persistently weak demand and short- to medium-term uncertainty. While businesses remain optimistic about a long-term recovery, concerns over the timing of demand rebound pushed business sentiment to its lowest level in nearly two years. Read more at Datatrack South Korea PMI: External Demand Recovery Drives Expansion, Domestic Recovery Uncertain South Korea’s January manufacturing PMI stood at 50.3 (prior: 49.0), returning to expansion for the first time in months. New orders and production marginally rebounded, benefiting from improved international demand. New export orders expanded for the third consecutive month, and backlog orders hit a 31-month high. Inflationary pressures continued to intensify, with import prices reaching their highest level since July 2022, forcing businesses to pass higher costs onto consumers to maintain profit margins. While business expectations for future production turned positive again, uncertainty over domestic economic recovery remained high. Global Manufacturing PMI Overview Overall, global manufacturing remains divided: The U.S. returned to expansion, repeatedly hitting recent highs. Europe remains in contraction but shows clear signs of easing. China fell back into contraction due to seasonal and policy inefficacy. Japan continued its prolonged downturn. South Korea turned to expansion thanks to external demand recovery. With the U.S. administration transitioning, global trade dynamics face a new turning point. Many countries have voiced concerns over U.S. tariff policy uncertainties, suggesting that future global manufacturing demand will heavily depend on the implementation or negotiation of Trump’s trade policies. Additionally, Europe must monitor political stability in Germany and France, while China faces the dual challenge of external pressures and domestic stimulus effectiveness. These factors will play a critical role in shaping regional demand trajectories moving forward.

Trump's Executive Orders at a Glance: From Tariffs to Immigration

U.S. President Donald Trump officially took the oath of office on January 20 and immediately signed a series of executive orders and memoranda addressing a wide range of issues, including immigration, trade, energy, federal personnel, national security, and gender and cultural policies : Trade and Economy Trump Announces 10% Tariff on China and 25% Tariff on Canada and Mexico (Effective February 4 for Canada) On February 1, Donald Trump announced the imposition of an additional 10% tariff on Chinese imports and a 25% tariff on goods from Mexico and Canada. For Canadian energy products, the tariff will be set at 10%, with implementation starting on February 4. These measures will remain in effect until issues related to illegal immigration and the influx of fentanyl are resolved. Establishment of an "External Revenue Service" Trump proposed creating a new agency to use tariff revenues to reduce domestic taxes, stating, "We will tax foreign goods, not the American people, for the benefit of the nation." Declaring an "Inflation Emergency" Federal agencies were directed to implement measures to expand housing supply, reduce healthcare costs, and create jobs while rolling back certain climate policies that have driven up energy and food costs. Withdrawal from the Global Minimum Corporate Tax Agreement Trump rejected the international minimum corporate tax agreement championed by the Biden administration, arguing it lacked formal congressional approval and was non-binding for the U.S.   Immigration Policy Southern Border Emergency and Military Deployment Declared a national emergency, deploying armed forces (including the National Guard) to secure the southern border and resuming construction of the U.S.-Mexico border wall. Mass Deportations and Enhanced Enforcement Advocated for the deportation of "millions of illegal immigrants," granting broader enforcement powers to ICE and CBP. Suspension of Refugee Resettlement Paused the refugee resettlement program, ended the "catch and release" policy, and planned to reinstate the "Remain in Mexico" program. Drug Cartels and Gangs Designated as Foreign Terrorist Organizations Groups like MS-13 and Tren de Aragua, along with Mexican cartels, were labeled foreign terrorist organizations, with plans to invoke the 1798 Alien Enemies Act to expel their members. Termination of Birthright Citizenship Issued an executive order ending automatic citizenship for children born to undocumented immigrants or those on temporary visas (e.g., tourist, student, or work visas).   Energy and Climate Withdrawal from the Paris Agreement and Expanded Oil and Gas Drilling Reaffirmed the U.S. withdrawal from the Paris Climate Agreement (formal withdrawal requires a year) and promoted offshore and Alaskan oil and gas development, pledging to "drill, baby, drill" and replenish the Strategic Petroleum Reserve (SPR). Ending Wind Energy Projects and EV Subsidies Ordered a halt to large-scale wind energy development and leasing, and terminated electric vehicle subsidies and related emissions exemptions.   Gender and Cultural Policies Binary Gender Policy and DEI Program Termination Declared that federal policy recognizes only two genders: male and female. Agencies were instructed to reflect biological sex on official documents, passports, and visas. Additionally, all Diversity, Equity, and Inclusion (DEI) programs within federal agencies were terminated.   Federal Government Creation of a Department of Government Efficiency Announced a new "Department of Government Efficiency" led by Elon Musk, with all federal agencies required to establish task forces to streamline processes and cut costs. Mandatory Return to Office and Hiring Freeze Ordered all federal employees to return to in-office work immediately and imposed a 90-day hiring freeze for federal civilian positions, excluding military, immigration, and national security roles. Withdrawal from the World Health Organization (WHO) Ordered the U.S. withdrawal from the WHO and halted funding, though formal exit requires a one-year notice and payment of outstanding dues. Regulation Freeze Directed all federal departments to halt drafting or issuing new regulations pending review by the administration or approval by appointed officials.   Other Mass Pardons for January 6 Capitol Riot Defendants Issued broad pardons for individuals involved in the January 6, 2021, Capitol riot, with 14 receiving sentence reductions. TikTok Ban Delayed for 75 Days Directed the Attorney General to delay enforcement of the TikTok ban by 75 days to ensure an orderly resolution while balancing national security concerns with the app's widespread use. Restoration of the Death Penalty Ordered the death penalty to be sought in cases involving the murder of law enforcement officers or violent crimes by undocumented immigrants, citing the need to protect Americans from violence.     -- (Photo Credit: Donald J. Trump)

Which President led the best U.S. economy? Clinton to Biden

The transition of power between U.S. presidents has always been a major focus on the political stage and a critical barometer for global financial markets. As Donald Trump returns to the White House on January 20, market reactions to potential policy directions have already been significant. In anticipation of his inauguration, the S&P 500 surged to 6,000, 10-year U.S. Treasury yields climbed to 4.6%, and the Dollar Index approached the 110 mark. These market movements reflect both the uncertainty surrounding new policies and the profound impact Trump’s stance on major domestic and international issues may have. Looking back at the terms of recent U.S. presidents, from economic reforms and geopolitical conflicts to global crises, their strategies have deeply influenced investor confidence and financial market trends worldwide. Below is an overview of the key policies and market performances under recent presidents, along with their broader economic and financial implications: Bill Clinton: From Deficit Reversal to the Prosperous Era of the Internet Frenzy n the early years of his presidency, Bill Clinton enacted the North American Free Trade Agreement (NAFTA) in 1994, creating the largest free trade zone in the world, encompassing the U.S., Canada, and Mexico. On the fiscal front, Clinton faced a $200 billion deficit left by former President George H. W. Bush and implemented measures to cut government spending and raise taxes, transforming the deficit into a surplus. Clinton’s tenure was marked by a booming internet technology sector, driving economic prosperity. By the end of his term, the U.S. economy had grown for 112 consecutive months, unemployment had dropped from a peak of 7.8% to 3.9%, and inflation was maintained between 2–3%. The stock market also surged, with the tech-heavy NASDAQ soaring from around 400 points at the beginning of his term to over 5,000 points. Read more at Datatrack However, Clinton’s presidency was not without challenges. From 1995 to 1996, disputes between Democrats and Republicans over budget planning led to a 21-day government shutdown, the longest in U.S. history at the time. Scandals such as the "Monica Lewinsky affair" almost resulted in his impeachment by the House of Representatives. Additionally, the frenzied development of the internet sector set the stage for the subsequent "dot-com bubble," which began bursting in early 2000, causing the NASDAQ to nearly halve to around 2,700 points by the end of his presidency. Read more at Datatrack   George W. Bush: A Turbulent Era of the War on Terror and the Global Financial Crisis Bush’s early presidency faced significant challenges, including the 2001 "dot-com bubble burst" and the 9/11 terrorist attacks. To combat economic recession and rising unemployment, Bush introduced tax cuts totaling $1.35 trillion in 2001 and $350 billion in 2003. Combined with the Federal Reserve’s 11 consecutive rate cuts, these measures facilitated economic recovery, with the S&P 500 rebounding to approximately 1,500 points. However, the recovery was short-lived. The Federal Reserve raised rates from 2004 to 2006 to curb inflationary pressures, tightening the once-lax housing market conditions. Subprime mortgage issues surfaced in 2007, culminating in a global financial crisis by 2008. Major financial institutions collapsed or faced liquidity crises. Despite the Fed’s swift return to rate cuts and the introduction of unlimited quantitative easing (QE), market panic persisted, with the S&P 500 plunging below 800 points. Although the Bush administration collaborated with Congress to implement financial rescue measures such as the TARP (Troubled Asset Relief Program), the U.S. economy remained in deep recession. Read more at Datatrack   Barack Obama: The Road to Recovery from the Subprime Crisis and Financial Reform Obama assumed office during the aftermath of the subprime crisis, with a struggling economy and high unemployment. In February 2009, he enacted the $787 billion "American Recovery and Reinvestment Act," which included $286 billion in tax cuts and over $500 billion in government spending to stimulate growth. To prevent future crises, the Obama administration also introduced the "Dodd-Frank Act" in July 2010, strengthening safeguards against systemic risks in the financial sector. Under Obama, the U.S. economy gradually recovered, supported by prolonged low interest rates, QE2, QE3, and fiscal policies. Unemployment fell from a peak of around 10% to 4–5%, while inflation remained controlled. The S&P 500 rebounded from a low of 700 points in early 2009 and reached new highs after 2013. In December 2015, the Fed initiated its first rate hike in nearly a decade, ending a seven-year era of zero interest rates. Read more at Datatrack By the end of Obama’s term, the S&P 500 surpassed 2,200 points, marking a prolonged bull market. Read more at Datatrack   Donald Trump: Market Maneuvers Amid Tax Cuts, Trade Wars, and the Pandemic In late 2017, Trump enacted the "Tax Cuts and Jobs Act" (TCJA), the largest tax reform since 1986, lowering corporate tax rates from 35% to 21% and reducing individual tax burdens to spur growth. Meanwhile, Trump’s "America First" policy led to tariffs on major trading partners like China and the EU and renegotiation of NAFTA, culminating in the USMCA (United States-Mexico-Canada Agreement). Despite ongoing U.S.-China trade tensions, the economy grew at a steady 2–3%, with inflation and unemployment remaining stable. The S&P 500 rose to over 3,200 points by 2019. Read more at Datatrack However, the COVID-19 pandemic in early 2020 triggered a global economic crisis, pushing unemployment from 3.5% to 14.8%. Massive fiscal measures, such as the CARES Act, and the Fed’s rapid return to zero interest rates helped markets recover. By the end of Trump’s term, the S&P 500 had climbed back to around 3,700 points Read more at Datatrack   Joe Biden: A New Chapter of Governance in Post-Pandemic Recovery and Inflation Challenges Biden’s presidency began during the post-pandemic recovery, with vaccines becoming widely available but economic and public health challenges persisting. His "American Rescue Plan" provided direct payments, unemployment benefits, and business loans to accelerate recovery. Biden also advanced the "Infrastructure Investment and Jobs Act" to modernize infrastructure and create jobs. However, with market demand rebounding, supply chain bottlenecks, and rising global raw material prices, inflation surged significantly in the second half of 2021. To curb overheating inflation, the Federal Reserve began tapering bond purchases at the end of 2021 and initiated quantitative tightening (QT) and a rate hike cycle in 2022. The Biden administration also signed the Inflation Reduction Act to ease inflationary pressures. As a result, concerns over stagflation and economic recession intensified, leading the S&P 500 Index to retreat to around 3,700 points. Against the backdrop of the Fed continuing to raise interest rates to restrictive levels and implementing QT, core inflation gradually fell from its 2022 peak of 6% to over 4% in 2023, with supply-demand imbalances also improving. Despite the restrictive rate environment suppressing market demand, the wealth effect created during the pandemic kept U.S. consumer spending strong, further boosting confidence in a "soft landing" for the U.S. economy. At the same time, the explosion of generative artificial intelligence (AI) in 2023 propelled the S&P 500 Index back above 4,700 points, its pre-rate hike level. Read more at Datatrack Entering 2024, market and labor demand gradually slowed under the influence of restrictive interest rates, but optimism around a "soft landing" persisted. The S&P 500 Index continued to rise to around 5,600 points, driven by the strong performance of AI-related stocks. Although mid-year labor market data cooled, shifting market sentiment toward pessimism, the Federal Reserve initiated rate cuts in September. However, economic data in the following months showed that the labor market remained healthy and consumer spending resilient, leading to renewed optimism in the market. By the end of the year, the S&P 500 Index had surged past the 6,000-point mark. Read more at Datatrack Since the 1990s, U.S. presidents have shaped global financial markets through economic policy, fiscal measures, trade strategies, and monetary policy decisions. From Clinton’s internet boom and free trade to Bush’s response to the dot-com bust and 9/11, Obama’s recovery from the subprime crisis, Trump’s tax cuts and protectionism, and Biden’s post-pandemic initiatives, each administration’s policies have significantly influenced the trajectories of stocks, bonds, and currencies. For investors and the global economy, understanding the dynamic relationship between U.S. presidential policies and financial markets remains an essential and ongoing task.

U.S. Debt Ceiling Returns: Renewed Fears of Shutdown and Liquidity?

With the U.S. Debt Ceiling Reinstated on January 2, 2025, Market Concerns Over Raising or Suspending the Debt Ceiling to Avoid Default Have Intensified. On December 27, Treasury Secretary Janet Yellen sent a letter to Congress warning that the debt ceiling could be reached between January 14 and January 23. If this happens, the Treasury may need to implement “extraordinary measures” and utilize the Treasury General Account (TGA) cash balance to prevent a technical default and another government shutdown. Notably, the Federal Reserve highlighted in its meeting minutes that the reinstatement of the debt ceiling would complicate the assessment of market liquidity and the impact of quantitative tightening (QT) due to the dynamic interaction between TGA balances, overnight reverse repurchase agreements (ON RRP), and bank reserves. In the short term, the U.S. Treasury is expected to mitigate default risks using the TGA account, temporarily alleviating market liquidity pressures. However, once the X-date is reached and large-scale debt issuance resumes, market liquidity will inevitably tighten. If the Federal Reserve has not concluded QT by the X-date, significant liquidity risks may arise. What is U.S. Debt Ceiling? The U.S. debt ceiling, determined by Congress, sets a statutory limit on the federal government’s borrowing to control debt growth. Established in 1917 to manage wartime fiscal spending, it has since been adjusted or suspended whenever the government needs additional borrowing capacity. However, prolonged legislative procedures often delay debt ceiling adjustments, risking a default and government shutdown. To avert this, the Treasury typically employs “extraordinary measures,” using TGA balances to cover government expenditures. Once these funds are exhausted, the government reaches the “X-date,” facing a technical default and a potential shutdown, causing broader market disruptions. Historically, the likelihood of a U.S. technical default has been low. The debt ceiling often serves more as a political bargaining tool between parties than an actual fiscal constraint. For instance, in January 2023, when the debt ceiling was reached, the Treasury deployed extraordinary measures until June, when Congress passed the “Fiscal Responsibility Act” to suspend the borrowing limit. This scenario mirrored the 2017 debt ceiling episode when the Republican-controlled Congress faced a similar situation. Interaction Between the Debt Ceiling, the Federal Reserve’s Liabilities, and QT The debt ceiling’s reinstatement directly impacts the Federal Reserve’s balance sheet, a focal point for investors and policymakers given the Fed’s dual role as a major holder of U.S. Treasuries and executor of monetary policy. The Fed’s balance sheet liabilities can be broadly categorized into three components: Bank Reserves: Funds held by financial institutions in their Fed accounts. Treasury General Account (TGA): The primary account for U.S. government transactions held at the Fed. Overnight Reverse Repurchase Agreements (ON RRP): A monetary policy tool allowing the Fed to sell securities to counterparties and repurchase them later at a higher price. Read more at Datatrack When the debt ceiling is reinstated and remains unchanged, Treasury issuance is constrained. Consequently, excess government spending must be covered through the TGA account, injecting liquidity into the private and banking sectors. This increases bank reserves and could drive funds into ON RRP as investors seek alternatives amid reduced Treasury issuance. Simultaneously, the Fed’s QT program—allowing bonds to mature without reinvestment—reduces market liquidity as primary dealers, banks, and money market funds absorb new Treasury issuances. This combination of QT and the debt ceiling introduces complex liquidity dynamics: while QT tightens liquidity by withdrawing market funds, TGA spending injects liquidity. These opposing forces obscure the true extent of liquidity tightening, complicating the Fed’s assessment of financial conditions. The Fed’s November meeting minutes emphasized that the debt ceiling’s reinstatement would amplify the challenges of evaluating market liquidity dynamics. Practical Impacts of the Debt Ceiling Reinstatement As of now, the TGA cash balance stands at approximately $652.6 billion. If extraordinary measures are activated in the coming weeks, market consensus suggests the X-date will occur in mid-2025. During the initial phase of extraordinary measures, TGA cash outflows will temporarily ease liquidity constraints, reflected primarily in reduced ON RRP balances as Treasury issuance slows. Bank reserves are expected to remain stable at around $3.2 trillion. After the X-date, the Treasury will need to issue significant amounts of debt to replenish TGA balances, reducing bank reserves and ON RRP balances, thereby tightening overall liquidity. If the Fed has not ended QT by this point, liquidity conditions could worsen, heightening systemic risks and the likelihood of market disruptions. This aligns with December meeting minutes showing market expectations for QT to conclude by Q2 2025. Although the Treasury’s use of extraordinary measures and TGA funds may temporarily alleviate liquidity pressures, the significant debt issuance required after the X-date will inevitably draw funds away from the banking system and money market funds, placing downward pressure on bank reserves and ON RRP balances. If the Fed continues QT during this period, the market will face even greater liquidity risks.