Even before taking office, the incoming United States Presidential administration signaled that “business as usual” was not going to continue. And with a mere four months under its belt, it is clear that the administration has made a sharp break with the past on trade and other economic policies.

Welcome to the “Great Discontinuity,” a rupture of the institutional, geopolitical and economic assumptions that underpinned the global economy for decades. These political actions mark the sharp deviation from a rules-based order and norms-based predictability that historically governed financial markets. In all scenarios, the actions already taken by this administration will have permanent effects on trade, investment and international finance.

It’s not just about tariffs. A wide range of policy initiatives are affecting economic decisions. For instance, by eliminating government departments and cutting back funding, the administration is reducing and redirecting public spending. The difficulty facing decision-makers is that the sheer quantity and unpredictability of policy moves and counter-moves in such a short period of time has been unprecedented and has created myriad uncertainties along with many knock-on effects. This is the most challenging moment for decision-makers in more than a generation. Unlike episodic economic shocks, the discontinuity facing financial markets is structural and systemic, stemming from the rejection of multilateralism, continuity and expert consensus.

The US breaks with the past

The Trump administration’s “liberation day” tariffs announced on April 2, 2025 shocked markets, policymakers and business leaders around the world. As it stands now, the 10-percent baseline tariff that is in effect today represents a historic shift (Figure 1. History of US tariffs). According to the Tax Foundation, a nonpartisan think tank, the weighted average applied tariff rate on all imports will rise to 27.8 percent under the tariffs currently in effect, and the average effective rate would be the highest since 1943, reversing a lifetime’s worth of free trade agreements.¹

The administration’s stated aim of tariffs is to significantly reduce the trade deficit. From a historic perspective, trade deficits have been the norm for the US. Since the 1970s,²  the US trade deficit has averaged two-to-three percent of gross domestic product (GDP) annually.³

But it’s not just trade policy that has fractured. Challenges to the independence of the Federal Reserve Bank, a long-standing legal and economic norm that investors have relied on, have rattled markets. Even raising the possibility of breaching with the past is in itself a momentous break. For example, the President raised the possibility of selectively defaulting on the debt in comments he made publicly on Super Bowl Sunday.⁴

Economic implications of the Great Discontinuity

If there’s one effect of the “Great Discontinuity” that is certain, it’s an increase in uncertainty. Trade policy uncertainty measured by Caldara et al. (2020), which counts the frequency of joint occurrences of trade policy and uncertainty terms across major newspapers, is currently at a historic high, surpassing the level of uncertainty during the US-China trade war in 2018-2019 by a wide margin.

Uncertainty invariably heightens risk aversion and dampens economic growth across the board. Investments and hiring are paused, customers suspend spending and capex projects are deferred. Financing costs rise with inflation and increasing risk premiums. In his recent interview at the Economic Club of Chicago with Raghuram Rajan, Federal Reserve Chair Jerome Powell said, “If the uncertainty remains high … people’s expected rates of return would have to be higher … if the United States were to become a jurisdiction where risks are just structurally higher going forward that would make us less attractive as a jurisdiction …”⁵

The trouble for forecasters is that uncertainty is hard to observe and measure precisely. Recent research from Federal Reserve Bank of St. Louis proposes a model that measures economic policy uncertainty shocks. Using this model, the author estimates that the uncertainty shock in the first quarter of 2025 surpassed the shock associated with the COVID-19 pandemic.⁶ A shock of this magnitude can have spillover and nonlinear effects, leading to larger reductions in economic activity for several quarters after the shock.

But uncertainty is not the only noticeable effect of the current US administration’s break with the past. An erosion of trust is another one. When the S&P 500 suffered its biggest one-day loss since COVID-19 in response to the administration’s April 2 tariff announcement, one would have expected to see investors flee into the safety of US bonds as historically has been the case. Instead, investors drove up bond yields, demanding higher rates to compensate for a perceived increase in risk. Furthermore, the US dollar, which has historically moved in the opposite direction to the stock market, even during the Great Financial Crisis and the COVID-19 pandemic, sold off despite the higher relative yield differential. There is now great concern of an erosion of trust in Treasuries and the US dollar as a reserve currency.

Then there’s also the rise of anti-American sentiment overseas. For example, Canadians are boycotting some US goods and canceling travel plans to America, and the Chinese government warned its citizens not to travel to the US. Negative sentiment against the US is growing and can have a detrimental impact on the US tourism industry as well as the brands and operations of global US companies.⁷

The rise of uncertainty, the erosion of trust and the emergence of anti-American sentiment around the world all point directly to a drag on US economic growth. Just how significant will be determined by economists in the coming weeks and months as the real economic impact is measured and reported.

The potential for more discontinuities

There are important economic “discontinuities” that can unfold from here, which may further complicate the outlook for slowing growth:

1. Inflation and anchoring risk
The market is closely watching for signs of inflation in the wake of the administration’s increase in tariffs. Data from State Street’s real-time, high-frequency indicator of price changes, PriceStats, will be available in early May – the first indication anywhere of how the administration’s tariff policy is impacting prices in the US. Recent fiscal and trade policies – including tariff-driven supply constraints, deficit-financed stimulus and efforts to re-shore supply chains – can potentially introduce structural upward pressure on prices.⁸ Empirical work shows that excessive demand stimulus in constrained supply environments can entrench inflation beyond cyclical factors.⁹ Additionally, interventionist rhetoric toward the Federal Reserve undercuts central bank credibility, threatening to un-anchor medium-term inflation expectations.¹⁰ Even if headline inflation moderates, the risk premium for duration-sensitive assets rises when markets question the Fed’s autonomy or inflation-targeting commitment.

2. Reserve currency fractures
The dollar's primacy rests not only on the size of the US economy, but also on confidence in policy stability, legal institutions and geopolitical reliability. Unilateral tariff escalations, extraterritorial sanctions and transactional diplomacy erode the trust that supports the dollar’s network effects in global trade and finance. Academic models underscore the role of confidence and inertia in sustaining reserve status.¹¹ Even perceived weaponization of the dollar can prompt diversification by foreign central banks and commodity exporters, amplifying incipient shifts toward alternative reserve baskets such as the euro, yuan or digital currencies.¹² Then there’s the risk of foreign investors reducing their exposure to US equities, further driving down the US dollar. In the wake of the administration’s tariff announcement, foreign investors dumped US equities, driving down the US dollar.¹³ In the era of the “Great Discontinuity,” there’s a significant risk this will continue. So far at least, according to State Street’s indicators of institutional investor behavior, investors are reducing risk, but are not positioned for panic. While the first half of April has seen the largest fall in equity holdings relative to bonds in more than four years, investors remain overweight equities and cash holdings remain well below past crisis levels.

3. Erosion of demand for US Treasuries
US Treasuries function as the global benchmark for safety and liquidity. But persistent fiscal imbalances, debt ceiling brinkmanship and a policy stance – seen as inward-looking or confrontational – dilute that safe-haven status. Studies show that rising debt levels can increase term premia, especially when institutional buyers (e.g., foreign governments) reassess sovereign credit trajectories.¹⁴ Even modest portfolio rebalancing by official institutions – driven by hedging or geopolitical motives – can elevate funding costs across credit markets. What’s more, foreign investors have accumulated significant exposure to US Treasuries over decades that may be unwound, another big risk for markets and investors.

Though still early, these potential discontinuities from long-held perceptions of inflation expectations, the US dollar’s hegemonic status, and US Treasuries as benchmarks for safety and liquidity could lead to a profoundly different economic landscape.
 

Key takeaways for investors

The “Great Discontinuity” was ushered in by the new US administration, and at any point could end with policy reversals or the unveiling of a more concrete and comprehensive economic policy roadmap. Barring that, investors are left on their own to discern a new future for the US economy. And investors should consider several themes that may not continue as before.

First, the post COVID-19 resilience of the US consumer and US equity market has been disrupted. Uncertainty, if it persists, will likely result in higher risk premiums across all asset classes, including those in the US.

Second and importantly, the US dollar and long-dated Treasuries are not, as of now, performing as safe-havens. Investors have only partially adjusted to this, but will likely need to diversify their asset holdings more if uncertainty continues. Assets with steady income flows can be highly sought-after in this uncertain environment. In addition, the breakdown of traditional relationships across asset classes also requires sophisticated tail risk scenario modeling and analytics.

Third, if US policies continue to become more inward looking, portfolios may need to become more outward looking, with careful attention paid to currency risk and changing correlations.

How effectively investors integrate these crucial new realities into their framework today will largely determine their capacity to navigate unpredictable economic shifts in this new era of the “Great Discontinuity.”