**Economic Landscape Under Trump: Challenges and Promises**
President Donald Trump has made commitments to lower prices and reduce interest rates, but fulfilling these promises may prove challenging due to the changes in the economy brought on by the pandemic. Current economic growth appears stable, buoyed by robust consumer spending; however, substantial budget deficits loom large, and these could increase further. As companies ramp up their investments in technology, particularly data centers and artificial intelligence, there is an increasing demand for loans, likely pushing interest rates higher.
During the World Economic Forum held in Davos, Switzerland, Trump expressed confidence in his ability to slash oil prices, asserting that this would automatically lead to a decrease in interest rates globally. He indicated that lower energy costs would mitigate inflation and suggested that he expects the Federal Reserve to heed his calls for lower rates.
However, Trump may be up against a more significant obstacle than anticipated. The economy has shown remarkable resilience, managing to recover from the pandemic, face inflation spikes, and navigate several recession fears over the past years, which could contribute to sustained higher borrowing costs. Jan Hatzius, chief economist at Goldman Sachs, noted that the economy is currently enjoying healthy growth, having expanded at an annual rate of over 3% for four out of the last five quarters. This is the most extended such period in a decade, with unemployment standing at a historically low rate of 4.1%. Furthermore, inflation, which hit a 40-year peak in 2022, has decreased to 2.4%, according to the Federal Reserve’s preferred metrics.
Wage growth has also surpassed inflation for the last 18 months, providing essential support for continued economic expansion. As a result, more Americans are looking to borrow for significant purchases like homes and vehicles, while businesses are investing in technology and manufacturing. This increased demand for loans could keep interest rates elevated, which may hinder the administration’s goals.
With consistent economic growth, companies enjoying robust consumer demand may pursue higher prices, as demonstrated by Netflix’s recent decision to raise subscription fees following a boost in subscribers. This trend contrasts sharply with the conditions surrounding Trump’s first entry into the White House in 2017, when the U.S. economy was just starting to recover from a prolonged period of weak growth and low inflation following the 2008-2009 Great Recession. At that time, many households were focused on debt reduction after years of borrowing, which previously contributed to increased pressure on prices.
Today’s economic climate, however, shows households generally carrying less debt, particularly among higher-income families benefiting from rising home values and stock market gains. Approximately 40% of homes are owned outright, reflecting increased wealth that encourages spending on travel, electronics, and dining. Furthermore, tech companies are investing heavily in data centers in pursuit of advancements in artificial intelligence. Trump recently announced a new partnership involving OpenAI, Oracle, and Softbank, pledging $500 billion to enhance AI development through improved infrastructure and energy generation.
According to Joe Brusuelas, chief economist at RSM, the economic dynamics have shifted significantly, marking an end to the era of low inflation and interest rates. The current environment is characterized by capital scarcity and higher rates, which leads one to question the sustainability of Trump’s promises to stimulate the economy through tax cuts and deregulation while also enforcing tariffs and immigration restrictions, potentially keeping prices elevated.
Gregory Daco, chief economist at EY, warns that these policies may compel the Federal Reserve to adopt stricter measures than they might otherwise pursue, maintaining a higher interest rate environment. Even in a scenario where the Fed lowers its key rate soon, that action may not directly lead to reduced borrowing costs, as market forces also influence rates for homes and cars. For instance, since the Fed began cutting rates in September, the yield on the critical 10-year Treasury note, which impacts mortgage rates, has risen considerably.
Investors appear to be pricing in expectations of continued economic growth, spurred, in part, by Trump’s proposed tax reductions and regulatory rollbacks, indicating a reduced likelihood of the Fed further cutting rates. In contrast, Trump’s tariff threats are often viewed by investors not as permanent measures but rather as negotiating tactics in international discussions.
The rising tide of protectionism, a shift from the previous two decades of globalization that generally kept prices down for manufactured goods, is another trend under Trump’s administration. Rather than contributing to lower prices, protectionist measures are contributing to the relocation of supply chains and barriers, with economists predicting increased prices, albeit modestly.
Compounding these concerns are persistently high budget deficits, which may further elevate interest rates as investors demand greater yields to purchase the Treasury securities necessary to finance government spending. Recently, the nonpartisan Congressional Budget Office projected this year’s deficit could hit $1.9 trillion, ballooning to $2.7 trillion over the next decade. Trump’s efforts to extend tax cuts introduced in 2017 and introduce new tax breaks would likely exacerbate these deficits. Fed Governor Chris Waller earlier this month warned that without addressing fiscal deficits, higher long-term bond yields are inevitable.
