Trump Inherits Strong Economy, But Tariff & Fiscal Risks Loom

Estimated read time 3 min read

U.S. Economy in a Strong Position as Trump Takes Office

As President-elect Donald Trump prepares to enter the White House next week, he inherits an economy that is expanding above trend, with a strong labor market and persistent inflation concerns.

Trump’s campaign promises of aggressive tariffs, immigration restrictions, deregulation, and tax cuts may face challenges in an economy that may not require stimulus but instead stability.

Mark Zandi, chief economist at Moody’s Analytics, warned:
“Success for the Trump administration would be to do no harm to the exceptionally performing economy it is inheriting. The combination of tariffs, deportations, and deficit-funded tax cuts will do harm—how much depends on their aggressiveness.”

A Different Economic Landscape From 2017

Unlike Trump’s first term, when tax cuts were seen as a boost to a slow recovery, the current economic climate does not need the same level of stimulus.

  • Inflation remains stubbornly above the Federal Reserve’s 2% target.
  • Mortgage rates have surged to nearly 7%, making housing less affordable.
  • 30-year Treasury yields have risen to around 5%, signaling market concerns over U.S. fiscal discipline.

Harvard economist Karen Dynan noted:
“If you believe the excess economic growth of the latter part of the Biden administration came from immigration, then reducing immigration could slow future growth.”

U.S. Economy Is Still Thriving

The latest data reinforces the economy’s strength:

  • The unemployment rate is at 4.1%, near sustainable levels.
  • 256,000 jobs were added in December.
  • Wages are growing, supporting consumer spending.
  • Inflation is easing but remains above target.

Federal Reserve Chair Jerome Powell stated in December:
“The U.S. economy is performing very, very well, but we have to stay on task with monetary policy tight enough to bring inflation to 2%.”

Fiscal Risks and the Bond Market’s Warning

While Trump has formed an informal Department of Government Efficiency to cut spending, there is no plan to address the main drivers of the deficit—healthcare and retirement benefits.

  • The bond market is signaling concerns, with rising Treasury yields reflecting fears over inflation and fiscal discipline.
  • Fed Governor Christopher Waller recently warned that if fiscal deficits don’t improve, markets may demand a higher premium on U.S. debt.

Waller stated:
“If fiscal deficits do not improve, at some point, the markets will demand a premium, and we are starting to see that unfold.”

Trump’s Policies Could Add Inflationary Pressures

With the economy already near full capacity, policies such as:

  • Tariffs on imports could raise costs for businesses and consumers.
  • Tighter immigration policies could reduce labor supply and push wages higher.
  • Tax cuts without spending reductions could increase deficits and drive interest rates higher.

These factors could force the Federal Reserve to keep interest rates high, limiting any room for aggressive rate cuts in 2025.

Uncertainty Over Trump’s Economic Strategy

Fed officials and economists remain uncertain about how Trump’s economic plans will play out. The December Fed meeting minutes indicated concerns that new trade policies could slow growth and raise unemployment.

Richmond Fed President Tom Barkin cautiously noted:
“I expect more upside than downside in terms of growth, but some of Trump’s policies could be walked back if they prove damaging.”

Looking Ahead: Stability or Disruption?

As Trump prepares to take office, investors and policymakers will closely watch:

  • His approach to trade and tariffs.
  • How his administration handles fiscal deficits.
  • The Federal Reserve’s response to policy shifts.

With the U.S. economy already performing well, Trump’s greatest challenge may be ensuring his policies don’t disrupt growth, raise inflation, or unsettle markets.

You May Also Like