Illustration: Aïda Amer/Axios

The Trump administration has directed agencies to suspend all federal grants and loans starting at close of business Tuesday.

Why it matters: The new administration is showing signs — in its unilateral actions and legislative strategy — that it is more serious about fiscal austerity than the last time President Trump was in office.

• That implies a very different fiscal policy for Trump 2.0, with pain ahead for federal funding recipients as well as downward pressure on inflation and interest rates.

Driving the news: The new directive is an audacious and legally dubious move, instructing agencies to “temporarily pause all activities related to obligation or disbursement of all Federal financial assistance, and other relevant agency activities” that could be affected by executive orders.

• Payments to individuals — including Social Security and Medicare — are exempted from the order.
• There is great uncertainty about how widely it will be applied, how long it will last, and whether it will be upheld by the courts. Legal scholars are skeptical.
• In effect, the administration is seeking to suspend billions in spending that was passed by both houses of Congress and signed by President Biden with a two-page memo from the acting director of the Office of Management and Budget.

Yes, but: Whatever happens next with this specific order, it’s only the latest sign that this administration is dead-set on slashing federal outlays — and willing to tolerate any political backlash it may cause.

• Congressional Republicans are looking to spending cuts, particularly for Medicaid and Biden-era climate initiatives, to help offset the fiscal cost of tax-cutting plans.
• Treasury Secretary Scott Bessent has set a goal of a budget deficit of 3% of GDP, achieved through spending reductions. That implies hundreds of billions of dollars a year in cutbacks.
• Elon Musk’s Department of Government Efficiency has pivoted its emphasis somewhat in recent weeks toward internal operations of agencies, but it has set reducing spending as a major goal.

Flashback: In Trump’s previous term, his administration offered big cutbacks in its budget proposals — but didn’t achieve them in practice.

• Discretionary federal spending was 13% higher in 2019, on the eve of the pandemic, than it was in 2016 before he took office. It was little changed as a percentage of GDP.

Between the lines: While meaningful spending reductions would be good for the government’s medium-term fiscal trajectory, they would also impede growth in the near term.

• It would, all else equal, exert a downward tug on inflation and justify lower interest rates from the Fed to offset that drag.
• Kevin Warsh, a potential Fed chair nominee, recently accused Fed officials of “cherry-picking” by fretting about the inflationary impact of tariffs while failing to factor in the possibility that spending cuts would “materially reduce inflationary pressures.”