Trump Returns to the White House: Implications and Expectations
November 21, 2024
Now that Donald Trump is walking back into the White house as the 47th President of the United States, his economic policies could have significant implications for inflation, interest rates, tariffs, and both fiscal and monetary policy. While his proposed tax cuts, deregulation, and infrastructure spending signal pro-growth intentions, other measures, such as tariffs and trade renegotiations, raise concerns about inflation, supply chain disruptions, and global trade tensions.
The ambiguity surrounding implementation timelines and details further clouds market outlooks. Bond yields and the U.S. dollar have already seen volatility, reflecting inflation fears and shifting expectations for Federal Reserve policy. Trump’s stance on tariffs could also introduce sector-specific risks, particularly for industries reliant on international supply chains.
Investors remain cautious, balancing optimism about potential domestic economic growth with concerns about global ripple effects. This policy-driven uncertainty has sparked heightened market sensitivity, with sectors and asset classes reacting sharply to any developments. On the bond side, the experts expect the yield curve to steepen further due to cuts in key interest rates and higher risk premiums at the long end due to rising fiscal deficits. Depending on how Trump’s plans are implemented, the outlook for long-dated government bonds could deteriorate. The range of possible outcomes is still very wide at present. As Trump’s administration takes shape, financial markets will likely remain on edge, closely monitoring emerging policy details.
Based on his past policies and statements, here is a snapshot of what his economic approach might look like and how it could impact the economy.
1. Trade and Tariff Policies
• Potential for Tariffs and Trade Tensions: Trump has consistently advocated for tariffs as a tool to protect American jobs and reduce the trade deficit. To raise revenues, Trump has suggested he could impose a blanket 20% tariff on all goods imported into the U.S, with a tariff of up to 60% for products from certain countries and as high as 2,000% on vehicles built in Mexico. Were he to come good on his promise – this would likely raise costs for American businesses and consumers.
• Impact on Inflation: Tariffs generally lead to higher import prices, which can contribute to inflation. If tariffs are applied to a wide range of goods, the added costs may filter down to consumers, thereby raising inflation. Trump’s prior focus on tariffs was particularly focused on industries like technology, agriculture, and manufacturing, where costs can be passed on as price increases.
• Economic Rationale: Trump has previously argued that tariffs encourage domestic production by making foreign goods more expensive, thereby incentivizing American companies to source domestically. However, while this may benefit certain sectors, the increase in prices can offset some of the intended benefits for consumers and lead to broader inflationary pressures.
2. Inflation and Interest Rates
• Inflationary Impact of Protectionism: The inflationary impact of protectionist trade policies would depend on how widely they are implemented and how U.S. trading partners respond. If new tariffs are imposed, inflation could rise due to increased import costs, especially in industries heavily reliant on foreign components.
• Pressure on the Federal Reserve: During his first term, Trump frequently expressed frustration with the Federal Reserve for not lowering interest rates enough, even pushing for rates near zero. Should inflation rise due to tariff policies, the Federal Reserve would likely face a dilemma between controlling inflation through higher interest rates or accommodating growth by keeping rates lower. Tariffs inhibit global trade, lower growth for exporters, and weigh on public finances for all parties involved. They are likely to raise inflation in the United States, forcing the U.S. Federal Reserve to act with tighter monetary policy, forcing the Fed to keep interest rates high for longer or to even reverse course and hike borrowing costs once again
• Trump’s Likely Preference on Interest Rates: Trump has historically favoured low-interest rates to stimulate growth, often criticizing the Fed when it raised rates. Given his focus on economic growth, he might push for a low-rate environment. However, if inflation rises due to his policies, the Fed might feel compelled to raise rates despite political pressure.
3. Fiscal Policy Preferences
• Infrastructure Spending: Trump has previously supported large infrastructure projects, proposing trillions of dollars in investments to rebuild roads, bridges, and other critical infrastructure. Such spending could stimulate economic growth in the short term but may also increase inflationary pressures if the labor market is tight and materials are costly.
• Tax Cuts: Trump has a track record of supporting tax cuts as a way to stimulate economic growth. During his first term, he introduced significant corporate tax cuts under the Tax Cuts and Jobs Act of 2017. Another term could see him push for further tax cuts, particularly focused on income tax relief for individuals or further reductions in corporate taxes.
• Deficit and National Debt: Trump’s preference for tax cuts and spending on infrastructure might lead to a rise in the federal deficit and national debt. Higher debt levels could exert upward pressure on interest rates if investors demand higher yields to hold U.S. Treasury bonds, although much would depend on the Federal Reserve’s policy response. Following Trump’s win, the prospect of fresh, “unfunded” spending — which would rely on borrowing more money from the financial markets rather than raising taxes — has left investors alarmed about future U.S. deficits and hence its debt pile, which some estimate could exceed $7 trillion over the next decade.
4. Monetary Policy Preferences and Fed Appointments
• Trump’s Influence on the Federal Reserve: While the president does not directly control monetary policy, Trump could influence the Federal Reserve through appointments. Presidents have the power to nominate members of the Federal Reserve Board of Governors, including the Chair. Trump has previously favoured Fed governors who support low interest rates, and he would likely continue this trend, potentially nominating “dovish” members who are more inclined to support growth and keep rates low.
• Potential Shift to Expansionary Monetary Policy: Trump’s likely preference for low interest rates and potentially more dovish Fed appointees could lead to an accommodative monetary policy stance. This stance, while beneficial for growth, could exacerbate inflationary pressures, especially if other Trump policies (like tariffs or spending) push prices higher.
5. Impact on Growth and Employment
• Short-Term Growth vs. Long-Term Stability: Trump’s approach to stimulating the economy through tax cuts, infrastructure spending, and low interest rates could lead to robust short-term growth, especially if implemented alongside efforts to deregulate industries. This would likely boost employment and consumer spending. However – with unemployment already at historically low levels, aggressive fiscal expansion could tighten the labour market further, pushing wages up and potentially adding to inflation.
6. Potential Risks and Challenges
• Recession Risks: If inflation becomes entrenched due to tariffs or excessive stimulus, the Federal Reserve might be forced to hike rates significantly to bring it down, potentially triggering a recession. Additionally, if Trump pursues a highly expansionary fiscal policy without corresponding revenue, this could lead to unsustainable debt levels, putting downward pressure on the dollar and financial stability. Former US Treasury Secretary and Economist Larry Summers warns that “if tariffs are used aggressively , instead of just threatened as leverage to make trade deals, there would be a “substantial adverse supply shock from higher prices.”
• Global Economic Tensions: Trump’s return to protectionist policies could lead to retaliation from other countries, increasing global economic tensions. Trade conflicts with major economies like China, Europe, or Japan could disrupt global supply chains, contributing further to inflation and potentially leading to slower global economic growth.