By Douglas Porter

January 16, 2026

Speaking of bad public policy decisions, Prohibition was ratified by the States on this very day in 1919. One year and one day later (January 17, 1920), it officially went into effect across the land, and was not repealed until late 1933—resulting in almost 14 years of (ostensibly) dry January-to-Decembers across the USA.

The 18th Amendment banned the production, importation, transportation and sale of all alcoholic products across the country. Of course, Prohibition didn’t actually stop the consumption of alcohol, as an industrial-scale cottage industry of bootlegging and rum-running stepped in to quietly meet demand, enriching those who had only passing acquaintance with the law.

Ironically, Al Capone’s birthday was on the same date as Prohibition went into effect—a better birthday gift he could not have imagined. One big lesson from Prohibition was that even well-intentioned policy can have major unintended consequences and can backfire badly, as policy can’t change human nature or demand.

This past year, and indeed this past month, has seen its fair share of questionable public policy decisions, and some of the unintended consequences are landing on the doorstep. In the financial sphere, the trade war has dominated the agenda since last January, and it is fair to say that it has not at all had the impact that anyone quite predicted.

For the legions of economists who called for much higher inflation and weaker activity from tariffs, we submit that this week’s U.S. CPI reported headline inflation of 2.7% y/y and core of 2.6% in December, the latter down from 3.2% a year ago. Meanwhile, global growth now looks like it was 3.3% in 2025, precisely the same pace as the prior year, and it’s expected to hold close to that respectable rate again this year.

And, it’s also true that tariff revenues helped cut Washington’s budget deficit; U.S. customs duties were $264 billion in calendar 2025, up $185 bln from the prior year, which alone accounted for more than half of the $351 bln reduction in the deficit in the past 12 months (to $1.667 trillion, or 5.4% of GDP).

However, for the proponents of tariffs, there’s the stark reality that the number of U.S. manufacturing jobs dropped by 68,000 in the past 12 months (-0.5%), actually slightly worse than the average drop of 65,000 in the two prior years. At the end of 2025, the share of U.S. payrolls in manufacturing was at a post-war low of 8.0%, and down from 8.5% at the start of 2017.

Moreover, the number one target of U.S. tariffs—China—has seemingly glided through the fray, reporting a $1.2 trillion trade surplus for all of last year, the largest surplus by any country, ever, even adjusting for inflation. China’s global exports rose 5.9% in 2025, despite a double-digit drop to the U.S., as it ramped up sales to the rest of the world.

And from the unintended consequences file, Canada’s limited deal with China to allow 49,000 EVs (or 2.5% of the domestic auto market) at a low tariff in exchange for lower 15% tariffs on canola sales can be viewed as a direct result of the ongoing trade spat with the United States.

Just this week, President Trump again claimed in Detroit that the U.S. didn’t need anything from Canada and that the USMCA was “irrelevant”, casting some serious shade on the upcoming review of the agreement and pounding home the need to strengthen ties elsewhere, with anyone. Of course, Prime Minister Carney is also facing some unintended consequences, as the U.S. Trade Representative promptly called the EV imports “problematic”, while Ontario Premier Ford decried the “lopsided” deal.

From the monetary policy file, there was the dramatic announcement by Fed Chair Powell that he was under investigation by the Department of Justice, and his startling response that this was a “pretext” to pressure the Fed to cut rates more rapidly. It’s not clear what was more jarring, the investigation or Powell’s fiery response, but the gloves are now clearly off.

One big lesson of Prohibition was that even well-intentioned policy can have major unintended consequences and can backfire badly, as policy can’t change human nature or demand.

Adding to the mix, central bank heads from around the world, as well as past Fed Chairs and Treasury Secretaries, offered full support for Powell, which, in turn, set off fresh controversy, including as far away as New Zealand.

For those who claimed this was a potential disaster for Fed independence, and would thus crank up the Sell America trend, there’s the stark reality that both the U.S. dollar and the 30-year Treasury yield barely budged on net this week. Implied inflation rates from TIPS nudged up slightly, but are actually lower than a year ago.

And equities have been mostly unfazed; the S&P 500 hit a record high on Monday, even after an early nod of concern on the Fed news. After all, stocks likely would have little quarrel with a dovish Fed, at least initially. Precious metals cast a rare vote of concern, with gold and silver leaping to new highs early in the week.

However, the move to pressure Powell could readily have a few unintended consequences. First, there is now the very real possibility that he stays on at the Fed as Governor, until that term ends in early 2028—meaning the new Chair will need to take Stephen Miran’s spot, and denying a net new dove on board. Second, the forceful response by a variety of Republican Senators to the investigation suggests that the new Chair will face even more intense scrutiny when confirmation time comes.

And, Kevin Hassett, who appeared to be the odds-on favourite as the next Fed Chair, has apparently been told he is still needed at the White House. (Kevin Warsh’s stock has risen notably.)

The list of proposed policies and unintended consequences hardly stops there, as this year has already witnessed a wave of such.

The capture of Venezuela’s then-President Maduro was seen as opening the door to increased oil production in that OPEC member. Yet, crude prices have actually risen to around $60, on Iran’s turmoil as well as underwhelming enthusiasm by Big Oil to return to Venezuela.

President Trump also vowed this week to lower credit card interest rates to 10%, which garnered support from those on the other end of the political spectrum. The industry response was a warning of the unintended consequence of this proposal being that credit availability could wane notably, possibly harming those the step was meant to help.

The massive investments in AI infrastructure have been a boon for the U.S. economy, helping GDP sail through the trade war at nearly a 4% average pace through the final three quarters of 2025. However, the voracious power demand of data centres has fired up electricity prices by almost 7% in the past year (and by that same pace over the past five years), compounding affordability woes. In turn, the President is now looking for the tech companies to shoulder more of the incremental power charges.

And then there’s Greenland. The President’s open desire for the U.S. to fully take control of the island has prompted many other members of NATO to profess support for Greenland. In turn, the President promptly threatened “anyone who didn’t go along” with tariffs. Presumably, though, such tariffs would fall under the guise of IEEPA, whose very legality remains under question before the Supreme Court.

Despite the cacophony of policy noise, the U.S. economy mostly flashed signs of improvement this week.

As noted, inflation was stable and largely as expected at the end of last year, the icy housing market is showing signs of a thaw, jobless claims fell below 200,000 last week, regional Fed surveys bounced higher to start the year, retail sales and industrial production both reported nice gains in the latest month, and the NFIB survey finds that small businesses sentiment improved late last year to above-average levels.

And while stocks did back off from their early-week record highs, the overall point is that they have largely picked up where they left off so far in 2026. Let’s toast to that, with a mocktail of course.

Policy Contributing Writer Douglas Porter is Chief Economist for BMO.