Why reality is unlikely to come close to matching the US president-elect’s rhetoric
US PRESIDENT-ELECT Donald Trump’s second administration starts at noon on Jan 20. Trump’s non-stop election campaign since losing to Joe Biden in 2020 suggests a better organised redo of his first term, with the same focus on tax cuts to boost the economy, higher tariffs to reshape US trade with the world, and deporting as many immigrants as possible to generate more opportunities for American workers. But times have changed, and reality is unlikely to match rhetoric.
In 2016, when Trump first won the presidency, the United States was experiencing a prolonged period of low inflation. The Federal Reserve kept interest rates near zero throughout his administration. This time, however, is quite different. Inflation spiked during the Covid pandemic, and the Fed is still on guard against a resurgence – hence interest rates remain relatively high. Trump’s proposed tax cuts imply a fiscal stimulus for an economy with low unemployment. Any signs of overheating will be met by tighter monetary policy.
Trump has made noises about changing the leadership of the Fed, but he cannot fire Fed chair Jerome Powell without risking both higher long-term interest rates and higher inflation. There will be tax cuts in 2025, mostly for rich people, and the consequent loss of revenue will undermine long-term fiscal sustainability. Larger deficits will keep interest rates higher than they would be otherwise, and the dollar may strengthen, creating difficulties for US exporters and for countries that have borrowed in dollars.
Share with us your feedback on BT’s products and services
