US President-elect Donald Trump campaigned on promises of aggressive import tariffs, strict immigration restrictions, deregulation and a smaller government, but the economy he will inherit next week may be crying out for something different.
That is, don’t break anything. With production expanding above trend, a labor market close to maximum employment and creating jobs. Embers of inflation still smoldering, Trump may be launching his promised reforms into an economy that is less in need of the kind of stimulus his 2017 tax cuts provided. As a selloff in stocks showed following December’s strong jobs report last week, may also be prone to a correction given high asset values and a bond market that has been pushing yields higher.
“The Trump administration’s success would be not damaging the exceptionally productive economy it is inheriting,” said Mark Zandi, chief economist at Moody’s Analytics. At first glance, the planned combination of tariffs, deportations and deficit-financed tax cuts “will do harm. How much depends on how aggressively these policies are implemented.”Trump will take office next week under very different economic circumstances than when he began his first four-year term in 2017.
“The limitations are different, starting with inflation,” which is still not fully under control since the peak of the pandemic era and has shown little year-over-year improvement in recent months, said Karen Dynan, an economics professor at Harvard University. and former Obama administration official. Trump also faces larger federal deficits and higher government borrowing costs than before, and a workforce that has grown faster than expected due to immigration, something Trump wants to reduce.
NEW LANDSCAPE FOR TRUMP
Referring to the recent performance of the United States, which has surpassed that of other developed nations and has surprised many economists, Dynan said that “if one believes that above-trend economic growth is due to immigration, it will be difficult to obtain such figures. big like those we saw in the last part of the Biden administration.”
When Trump entered the White House in 2017, the economy had been growing steadily since the end of the 2007-2009 financial crisis, but the pace was often slow and employment had not fully recovered. There was room for the boost provided by Trump’s landmark Tax Cuts and Jobs Act, and while the import tariffs that followed dealt a blow to the global economy, the United States proved largely resilient.
What had been the longest US economic expansion in modern times only ended when the COVID-19 pandemic began in March 2020. Back then, inflation was a distant concern, seemingly anchored below the 2% inflation target. the Federal Reserve. Home buyers could find 30-year fixed-rate mortgages at around 4%, and the government financed their operations with long-term Treasury bond rates of around 3%.
Today, inflation remains slightly above the Federal Reserve’s target, mortgage rates are near 7% and 30-year Treasury yields are around 5% and rising, a fact that may reflect doubts of the market on whether inflation is contained and on American financial discipline going forward. “There’s still concern that you can’t beat inflation… We’re going to solve that problem, so don’t worry,” Federal Reserve Governor Christopher Waller said last week of rising U.S. yields. long-term bonds.
But “the other issue that is getting more and more attention is concerns about fiscal deficits… If that doesn’t seem to change in the future, at some point the markets are going to demand a premium… That’s what we’re starting to see.” While Trump has created an informal Department of Government Efficiency to find savings, there is no plan to address the main drivers of the deficit: health and retirement benefits for seniors, which both political parties consider sacrosanct.
IT IS PERFORMING ‘VERY, VERY WELL’
If government borrowing costs and surveillance of bond markets pose one potential set of constraints for Trump, the state of the economy could pose another. The main data that Federal Reserve staff and officials watch, including figures on employment, inflation, consumer spending and overall growth, may not offer much risk-free room for improvement.
For example, the unemployment rate in December was 4.1%, near or below many estimates of what is considered sustainable without generating inflation, and the economy created an impressive 256,000 jobs. With wages rising, consumer spending remains healthy. Inflation is falling, but is still more than half a percentage point above target, and there are concerns that it could be revived by any aggressive measures to boost output that may already be exceeding potential or by additional costs arising from issues such as the tariffs.
“The U.S. economy is doing very, very well,” Federal Reserve Chairman Jerome Powell said at a Dec. 18 news conference at the end of the central bank’s latest policy meeting. “But we have to get on with the job,” and maintain a monetary policy restrictive enough to bring inflation back to 2% while keeping the labor market intact.
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Between Trump’s plans and the strength of the economy, there are growing doubts about whether the Fed will be able to cut rates much further, if at all. The uncertainty about what’s next is rooted in the gap between Trump’s expansive rhetoric about what he seems to think the economy needs and actual economic performance over the past year in particular. At last month’s Federal Reserve meeting, staff began suggesting that slower growth and higher unemployment could be the immediate result of planned trade and other policies.
Policymakers have publicly highlighted the uncertainty they face while trying to strike some balance. Noting that companies themselves have been optimistic about future conditions, despite potential disruptions from tariffs and deportations, “I expect more upside than downside in terms of growth,” the Federal Reserve chairman said last week. of Richmond, Tom Barkin, although he also acknowledged the possible risks of inflation.
And, Barkin said of the incoming administration’s potential policy initiatives, “some of them could be reversed if they prove detrimental.”
With information from Reuters.
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