WASHINGTON — President Donald Trump has vowed to lower prices and reduce interest rates; however, the economic landscape altered by the pandemic presents significant challenges to fulfilling those commitments.

Growth in the economy remains robust, primarily due to strong consumer spending. Yet, significant budget deficits continue to loom large and may expand further. In addition, businesses are increasing their borrowing to invest in data centers and artificial intelligence, leading to heightened demand for loans, which may drive interest rates up.

Economists are concerned that if Trump goes ahead with his intentions to impose broad tariffs on imports and deport large numbers of immigrants, inflation could intensify, making it less probable for the Federal Reserve to lower its key interest rate significantly this year.

These economic trends are likely to keep borrowing costs elevated, impacting loans for homes and vehicles.

During the World Economic Forum’s annual gathering in Davos, Switzerland, Trump stated, “I’ll demand that interest rates drop immediately, and likewise, they should be dropping all over the world,” although he did not elaborate on how these goals would be achieved.

The resilience of the economy following pandemic disruptions, coupled with trillions in government financial support from both Trump and former President Joe Biden, an inflation surge, and various recession fears contribute significantly to the expectation of sustained higher borrowing costs.

Jan Hatzius, the chief economist at Goldman Sachs, described the economy as being in a “sweet spot of healthy growth.”

It has been expanding at an annual rate of at least 3% in four out of the last five quarters, marking the longest such streak seen in a decade. Unemployment stands at a historically low rate of 4.1%. Furthermore, after reaching a four-decade high in 2022, inflation has decreased to 2.4%, according to the Federal Reserve’s favored measures.

In addition, wages that lagged behind prices in 2021 and 2022 have outpaced inflation for the last 18 months, fueling continued economic growth.

A stronger economy encourages Americans to borrow for major purchases such as vehicles, homes, and appliances, while businesses expand their investments in IT and manufacturing. Although these actions benefit the economy, increased loan demand can also keep interest rates high.

Additionally, steady economic growth may sustain elevated prices. Companies experiencing strong consumer demand could decide to increase their prices, as evidenced by Netflix’s recent decision following a surge in new subscribers.

This scenario contrasts sharply with the state of the economy when Trump first assumed office in 2017, as the U.S. was gradually recovering from a prolonged phase of sluggish growth and minimal inflation post the severe 2008-2009 recession. Many households had curtailed spending and opted to save more after a period of excessive borrowing that increased their mortgage and credit card debts.

Julia Coronado, president of MacroPolicy Perspectives and a former Fed economist, noted that households were reducing their debt relative to their incomes at that time – a disinflationary influence that is now absent.

Currently, with households accumulating less debt overall, high-income families have particularly benefited from appreciable increases in home values and stock market wealth. Approximately 40% of homebuyers now own properties outright, without mortgages. This wealth encourages ongoing spending on leisure activities, electronics, and dining experiences.

Moreover, technology companies are escalating their investment in data centers to enhance their work on artificial intelligence. Recently, Trump announced a joint venture between OpenAI, Oracle, and Japan’s Softbank to invest $500 billion in data centers and power generation to advance AI research. Prior to the pandemic, many corporations held sizeable cash reserves and were not investing significantly, which contributed to lower interest rates.

Joe Brusuelas, chief economist at RSM, noted, “We are in a different world.” He further stated that the era characterized by low inflation and low interest rates has been replaced by a new environment of scarce capital and higher rates.

Consequently, Trump’s commitments to invigorate the economy through tax reductions and deregulation, alongside the possibility of imposing tariffs and limiting immigration, may sustain elevated prices. Gregory Daco, chief economist at EY, remarked, “That’s going to be inflationary, and that’s going to push (Fed) policymakers to adopt more stringent policies than they would otherwise.” This development sets the stage for a higher interest-rate setting.

Trump aims to increase domestic oil and gas production to lower energy prices and curb overall inflation, which could allow the Fed to lower its key interest rate.

However, the reactions of financial markets—which also influence borrowing costs for homes and vehicles—remain a critical factor. Since the Fed commenced its key rate cuts in September, the yield on the 10-year Treasury note, a significant determiner of mortgage rates, has escalated sharply.

Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, indicated that investors predict sustained stronger growth, partly spurred by Trump’s proposals to cut taxes and lessen regulation. This outlook suggests that the Fed may be less inclined to reduce its key rate anytime soon.

Many investors appear to believe Trump’s tariff threats are political leverage rather than indicators of permanent impositions.

“I think there was an expectation that President Trump would bring all of the good policies and leave all of the bad policies for growth at the door,” Goldberg added.

Additionally, the trend towards protectionism around the world—a shift initiated by Trump—has emerged after two decades of globalization, prompting multinational corporations to seek alternative manufacturing sites outside of countries like China, opting for places like Vietnam or Malaysia instead.

Brusuelas remarked, “Instead of globalization driving prices lower, or at the very least putting a constraint on them, we’re now relocating supply chains and protectionist barriers are going up.” This transition is expected to elevate prices, though the anticipated increase may be modest.

Another factor is the stubbornly high federal budget deficits, which may also lead to rising interest rates. Wall Street investors often demand higher yields to purchase Treasury securities needed for financing national debt.

The Congressional Budget Office recently projected that this year’s deficit could reach approximately $1.9 trillion, with expectations for it to grow to $2.7 trillion over the next decade. Trump’s initiatives to extend his 2017 tax cuts and introduce new ones, including eliminating taxes on tips, could further exacerbate these deficits.

Fed governor Chris Waller recently noted, “If we don’t get fiscal deficits down, we’re going to see higher longer-term bond yields,” a trend already in motion.