In America, meanwhile, hawks are demanding full-scale war on Iran, including attacks on its oil infrastructure, in the belief that this would force the regime to abandon its nuclear-weapons programme, hand over its stocks of highly enriched uranium and let shipping resume. This is unlikely to work, given Iran’s chokehold over the strait, and Mr Trump, who appears to be resisting such demands, is right to do so. Oil prices wobble with each newsflash, but have yet to rise nearly as far as they could. China and other big importers have found ways to curb demand, America and other exporters have boosted production and several countries have tapped their reserves. But this cannot go on for ever. Demand for petrol and jet fuel typically soars in the summer, and reserves in many places (though not China) will run low by autumn. After that, the energy crunch could be excruciating. American voters, feeling pain at the pump, will punish Republicans in the midterm elections in November. So Mr Trump needs to make a deal with Iran. Forget about anything as good as the pre-war status quo, let alone the deal Barack Obama struck in 2015 to restrain Iran’s nuclear ambitions, which Mr Trump tore up. The best Mr Trump can hope for is a makeshift pact to reopen the strait in exchange for an extended ceasefire that may, with luck, become permanent. Economic sweeteners will be necessary. The threat of force will remain. Haggling over
Iran’s nuclear programme will have to come later. Such a deal would be unstable, and humiliating for America. Yet it would be less bad than any plausible alternative. For all Mr Trump’s plans to erect a triumphal arch in Washington, his war on Iran has cost America dearly. ■ Subscribers to The Economist can sign up to our Opinion newsletter, which brings together the best of our leaders, columns, guest essays and reader correspondence. This article was downloaded by zlibrary from https://www.economist.com//leaders/2026/06/10/donald-trumps-least-bad-option-in- iran
The Federal Reserve must soon give Donald Trump bad news Kevin Warsh, the unlucky new chairman, has seen his case for lower interest rates disintegrate June 11th 2026 FOR MOST of Kevin Warsh’s career, becoming chair of the Federal Reserve with the American economy hot and in need of higher interest rates would have been the stuff of professional nirvana. Few central bankers had staked out so hawkish a reputation. So it is ironic that this scenario has come to pass, yet it seems likely to make Mr Warsh’s life miserable as he starts at the Fed. For that, he can thank the circumstances of his appointment. President Donald Trump wants lower interest rates, and appointed Mr Warsh in January because he, too, favoured them. Back then, the economic case for
looser money was respectable: the post-pandemic inflation surge had been all but killed, and the jobs market looked like it was wobbling. Mr Warsh’s out-of-character doveishness provoked wry smiles but not scorn from other central bankers, most of whom were glad that Mr Trump had picked someone sane for the job. Alas, the happy coincidence is over. The case for lower interest rates has crumbled. Mr Trump still wants rate cuts but, if anything, today’s economic conditions demand tighter money. Since Mr Warsh’s appointment America’s labour market has firmed up. From March to May payrolls swelled by an average of 188,000 per month, far above estimates of growth in the labour force at a time when migration is low or negative. Until November the unemployment rate had been gently rising; it has since fallen and held steady at 4.3%. The economy is exuberant. Stock markets are near record highs, as a sugar-high from tax cuts collides with excitement about artificial intelligence. The Atlanta Fed’s real-time GDP gauge puts growth at a 3.3% annualised pace in the second quarter. Higher oil prices, the result of Mr Trump’s war with Iran, have pushed up annual inflation, to 4.2% in May, a three-year high. Often central bankers
ignore inflation that comes from oil prices. That is difficult today because inflation has exceeded the Fed’s target for more than five years. Overshoots could get baked into the public’s expectations. Inflation that started with oil could take on a life of its own. The novel arguments Mr Warsh has advanced for lower interest rates look shakier than ever. While vying for Mr Trump’s nomination, he claimed that he had ditched his career-long hawkishness because of advances in AI. The technology would soon unleash such abundance, he argued, that inflation would be vanquished, leaving the Fed plenty of space to cut interest rates. So far, something closer to the reverse has happened. Stock-market euphoria and the boom in data-centre construction have stoked America’s consumption and investment respectively and probably raised inflation. And Mr Warsh’s new colleagues have lined up to remind the incoming chair that if AI lifts productivity growth, economic theory suggests interest rates would need to go up, not down, thanks to stronger appetites for spending and investment. About half of the Fed’s voting rate-setters, whose support Mr Warsh needs to change policy, have now made versions of these points in public. Mr Warsh’s other big idea was to cut the Fed’s bond holdings, which would amount to a tightening of monetary policy through the balance-sheet. Doing so would open up space to reduce interest rates at the same time, he argued, akin to keeping your office comfortable by turning on the heating and air- conditioning at the same time. But the effect of this quantitative tightening (qt) would be piddling. Stephen Miran, a former Fed governor and an ally of Mr Warsh, has entertained shrinking the balance-sheet by about 5% of GDP. Rules of thumb suggest that would lift long-term bond yields by roughly the same amount as just one quarter-of-a-percentage-point interest-rate rise. And even that is probably an overestimate. Bond-buying works in part by signalling where interest rates are heading. For example, after the global financial crisis of 2007-09 it conveyed that rates would not rise for a long time. Under Mr Warsh’s scheme, by contrast, the balance-sheet and rates would pull in opposite directions. QT would presage lower rates, and so might not raise long-term bond yields.
Interest-rate cuts should be firmly off the table when Mr Warsh kicks off his first monetary-policy meeting on June 16th. The new chair has some ability to play for time and concentrate on a list of nerdy reforms he wants to make at the Fed. But if rates move later this year, it is likely to be up, not down. At some point Mr Warsh will have to give Mr Trump bad news. ■ Subscribers to The Economist can sign up to our Opinion newsletter, which brings together the best of our leaders, columns, guest essays and reader correspondence. This article was downloaded by zlibrary from https://www.economist.com//leaders/2026/06/09/the-federal-reserve-must-soon-give- donald-trump-bad-news
For its own sake, China should change its growth model It is suffering economic costs for its industrial dominance June 11th 2026 In global trade, limitation is the sincerest form of flattery. China’s manufacturers have become formidable global competitors, even in sophisticated industries that were once the preserve of much richer countries. They have outflanked Germany’s carmakers, stolen a march on South Korean shipbuilders and narrowed the gap with American chip designers. It is a tribute to their success that world leaders are scrambling to limit the threat to cherished domestic industries and avoid risky dependencies. Later this month, for example, ministers from the European Union will meet to consider more forceful countermeasures. One idea is to require European firms to diversify their suppliers, rather than relying so heavily on Chinese inputs.
The evolution of China’s exports, which grew by more than 19% year-on- year in May, is a source of satisfaction for the country’s leaders. Trade’s contribution to growth has helped the country withstand the bursting of its property bubble in 2021. China’s dominant position in many international supply chains also gives it geopolitical clout in a hostile world. The country’s leaders believe in their historical-materialist bones that national greatness lies in technological sophistication and manufacturing might. Chairman Mao believed that power grew out of the barrel of a gun, and that heavy industry makes a country strong. His successors hope that high-tech exports will make China indispensable. But although it is a source of pride for China’s leaders, the country’s high- tech advance has not lifted the animal spirits of China’s people. Consumer confidence has still not recovered from the covid-19 lockdowns and the property slump, despite a stock-market rally in late 2024. Retail sales in April rose by only 0.2% compared with a year earlier, even before adjusting for inflation. Car sales collapsed, declining by more than one-fifth. Judged not by industrial prowess but by the health of the overall economy, China’s growth model is failing. There are several reasons for the incongruity. Unlike its past export booms, which drew millions of migrant workers to coastal factories, China’s more recent success has not generated many jobs. Export prices have risen faster than volumes. And China’s leading industries are no longer labour-intensive. Spending on electric vehicles generates fewer jobs per yuan than an equivalent outlay on traditional cars or new homes. The proportion of migrant workers finding jobs in manufacturing has dropped from almost 37% in 2010 to 28% last year. Many instead work as delivery riders or elsewhere in the gig economy. They occupy bike lanes, not assembly lines. China’s high-tech industry is also tightly clustered in a handful of cities. This geographical concentration is one source of its strength, allowing suppliers to specialise, talent to congregate and ideas to circulate. But it also widens the divide between leading and lagging regions. China’s previous growth model, based on manic home-building, was dispersed across the entire country, including some unpromising backwaters it should probably have left undisturbed. China’s new model is pickier about place. Inland