Last week, JPMorgan boss Jamie Dimon told an economic forum in California that the US bond market was going to “crack” under the weight of Donald Trump’s “Big, Beautiful Bill”. He said of the bill now working its way through Congress, “I just don’t know if it’s going to be a crisis in six months or six years,” before adding that he had told regulators to expect panic when the moment came.

Dimon’s warning is just the latest from a prominent voice in the financial sector, saying the US is running perilously close to a crisis. It has added to the general mood of tension rising in markets as the clock runs down on Trump’s signature initiative. With the President’s main tariff policy on ice due to a recent court ruling, the extension of the 2017 tax cuts remains the linchpin of his economic programme. If it fails, he risks being seen as a busted flush.

But there are only a few weeks left to pass it. Sometime this summer, the US will hit its statutory debt ceiling, something which can only be raised by an act of Congress. Since Congress goes on recess in August, that leaves just the few weeks remaining to the end of July for the Senate to pass the House bill.

And right now there’s a standoff in the Senate. Although fiscal hawks are a dying breed in today’s Republican Party, there are still a few holdouts left, and they seem to regard this battle as their last stand. Their leader is Senator Ron Johnson, who insists he has the numbers to stop the bill in its current form. He is demanding much deeper cuts to spending than the bill passed by the House, which already took a hatchet to Medicare and food stamps.

But even deeper cuts could cause problems for senators in swing states, or for House Republicans facing tough re-elections next year. House Republican opposition to Trump’s bill buckled under his pressure, but it’s just possible the senators may prove less malleable.

In the meantime, bond investors keep sending signals that they’re girding for a fight. So far, the major market indices have shown broad equanimity amid the ructions of recent events: the stock market is flat but not falling, and bond prices are declining but not crashing.

But what explains this relative peace? Retail investors have eagerly bought the dips caused by the retreat of institutional investors, their faith animated by what has been termed “TACO trade”, meaning “Trump always chickens out”. Markets have so far behaved as if Trump will always roll back policies which damage stock and bond markets, and will instead proceed with the most market-friendly ones, such as tax cuts.

This uneasy balance may not last, however. If the Senate approves the House bill and the deficit worsens, bond markets could panic. If it placates the bond market by demanding much steeper spending cuts in the final legislation, the fiscal compression could slow the economy, knocking the wind out of stock markets. The worst scenario of all might be that Trump, who apparently hates the TACO label, could decide to stick it to markets altogether and return to his tariff-heavy, deficit-busting programme, and all investors take fright.

With evidence mounting that foreign investors are already heading for the exits, such an outcome could trigger the sort of financial crisis of which Dimon and his ilk warn. All eyes will thus be on the Senate to see if it heeds their increasingly loud calls.

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John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a Religion (Simon & Schuster, 2017).

jarapley

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