Donald Trump said earlier this year that if he were to be re-elected, “incomes will skyrocket, inflation will vanish completely, jobs will come roaring back, and the middle class will prosper like never before”.
The majority of US voters have bought into that pitch, but many economists do not.
Instead, they warn that his plans to enact sweeping tariffs and deport millions of immigrants risk will do the exact opposite of what the president-elect claims — reigniting inflationary pressures when the worst bout for a generation has yet to be fully tamed.
While stock markets were boosted by Trump’s pledge to lower taxes for the wealthy and corporations, others think those moves will store up issues for years to come, expanding the already-large government deficit.
Add to that the US president-elect’s threats to meddle with the US central bank, and many think Trump’s second term in the White House could spell trouble for the world’s largest economy.
“These kinds of policies — deportation, incursions on Fed independence, tariffs on an unprecedented level — they all inject additional uncertainty into the economic environment,” said David Wilcox, a former Federal Reserve staffer who now works at the Peterson Institute for International Economics.
“There’s not much these days that unites businesspeople, households and policymakers,” said Wilcox. “But there is one concept that does unite just about everybody, and that is that uncertainty is really damaging economically.”
The economists who support Trump’s economic agenda — figures such as Stephen Moore, Arthur Laffer and Larry Kudlow — believe his tax cuts will boost demand. Their impact on growth will raise tax revenues, shrinking the country’s gargantuan deficit in the process.
Others think the lower levies could provide a short-term boost to growth too.
“Trump’s victory will ensure a lower tax environment that should boost sentiment and spending in the near term,” said James Knightley, economist at ING Bank. “However, promised tariffs, immigration controls and higher borrowing costs will increasingly become headwinds through his presidential term.”
While inflation is not fully under control, the president-elect will take the helm at a time when the world’s largest economy is, by most metrics, in rude health.
Jobs are plentiful, lay-offs are low and consumers continue to spend, despite a surge in US interest rates, which — until recently — left borrowing costs at a 23-year high. Once rampant, recession fears have faded as inflation has fallen from above 7 per cent to close in on the Fed’s 2 per cent target, suggesting a much-anticipated soft landing is within reach.
“The economy is still pretty solid,” said Karen Dynan, a former senior Fed staffer now at Harvard University. “We’re getting much closer to normal inflation conditions [and] nothing suggests the labour market is in a worrisome spot.”
Republicans captured control of the Senate on Tuesday and have made inroads in several House of Representatives races that will need to swing to Democrats if they are to win the lower chamber of Congress.
If Republicans are victorious there too, Trump would have much more leeway to push through even the most unorthodox parts of his economic agenda.
Trump’s plan centres on sweeping tariffs that he claims will not only bolster US manufacturing, create jobs and lower prices, but will also hand the country a powerful bargaining tool in negotiations with allies and adversaries.
Calling such levies the “greatest thing ever invented”, Trump has floated the idea of across-the-board tariffs of up to 20 per cent on all imports as well as 60 per cent tariffs on Chinese goods.
He has said he will pair those plans with what he has deemed the “largest deportation programme in American history”. If the president-elect enacts that programme — shrinking the US labour force in the process — economists warn that could force up wages and undo some of the work the Fed has done so far in terms of tackling inflation.
Şebnem Kalemli-Özcan, an economist at Brown University, predicts that unemployment could also rise as businesses are forced to cut back in the face of higher costs borne from tariffs and higher wages resulting from changes in immigration policy.
“These policies are pushed as policies that will create more jobs for Americans, but the effect is going to be the exact opposite,” said Kalemli-Özcan.
The US central bank, which began lowering borrowing costs in September, would potentially be forced to reverse course should price pressures re-emerge.
During Trump’s first presidency, the Fed responded to an intensifying trade war between the US and China by lowering interest rates by 0.75 percentage points, in what it likened to taking out insurance against the possibility of a significant blow to growth.
But with the embers of inflation not yet fully snuffed out, the policy response could look different from in 2019, when inflation was below the Fed’s 2 per cent target.
The tariffs and immigration restrictions Trump put in place during his first term did not generate significant inflation, but they were of a far smaller scale than what the president-elect has proposed for his next four years in office.
In his first term, Trump repeatedly attacked the Fed and its chair, Jay Powell, for not lowering interest rates earlier and more aggressively. This time, he has floated more direct interference with the central bank, including advocating for having a greater say over monetary policy decisions.
The Fed has “a lot of legal and institutional safeguards” to protect its status as an independent institution, says Vincent Reinhart, a former Fed official who is now chief economist at Dreyfus and Mellon. That includes extended term limits for governors, whose appointments require Congressional approval.
Powell’s term as chair ends in May 2026, and before that there is only one other vacancy on the board of governors that year. The next opening would not come up until 2030, when Christopher Waller’s term expires.
Still, any indication that the Fed’s independence is being eroded could have severe financial market consequences — a growing fear given the enormous deficits the country is set to run during Trump’s second term.
The US president-elect’s vow to extend tax cuts on the wealthy that are set to expire in 2025, as well as reducing the corporate tax rate for domestic producers and exempting certain forms of pay from income tax, would add a further $5.8tn to the deficit over the next decade, according to the Penn Wharton Budget Model at the University of Pennsylvania.
“The conversation we need to have as a nation is about getting fiscal policy on to a sustainable trajectory. The first step in addressing that problem is not to enact an aggressive programme of additional spending or aggressive tax cuts,” said Wilcox, who is also the director of US economic research at Bloomberg Economics.
“Trump has made it clear that he has no concern whatsoever for fiscal sustainability.”
Additional reporting by Sam Fleming in London
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