President-elect Donald Trump’s Republican party has secured control of both chambers of Congress, paving the way for his economic agenda to be implemented. The proposed tariffs on imported goods and services are expected to have mixed effects, with some short-term gains in trade deficit reduction but long-term concerns about inflation and economic growth.
Tariffs are likely to lead to increased demand for domestic goods, resulting in higher prices and upward pressure on interest rates. This would ultimately strengthen the US dollar, hurting US exporters and increasing unemployment among unauthorized immigrants. The trade balance is unlikely to improve significantly, and tariffs may even lead to less economic activity.
Trump’s promise to deport 1 million undocumented immigrants annually is also expected to have negative effects on the economy. A significant increase in the federal budget deficit is anticipated, which could lead to higher interest rates and a stronger dollar.
The proposed tax cuts, including lowering the corporate tax rate from 35% to 15%, are likely to worsen the fiscal situation. The Congressional Budget Office forecasts suggest that this would lead to an unsustainable primary deficit of around 4-5% of GDP, potentially destabilizing the debt ratio.
Ultimately, the most critical issue is what the Federal Reserve will do in response to Trump’s policies. Fed Chair Jay Powell has committed to maintaining a hawkish stance, and it is unlikely that he or other board members would abandon this stance in favor of lower interest rates. This poses a significant risk to Trump’s economic agenda, as higher interest rates could offset any short-term gains from his policies.
While the initial positive effects of Trump’s economic agenda may last for a while, it is likely that they will fizzle and possibly reverse, particularly if investors begin questioning the risk-free status of US Treasuries. The Federal Reserve’s ability to maintain its mandate and control inflation will be crucial in determining the ultimate success of Trump’s policies.
Source: https://www.piie.com/blogs/realtime-economics/2024/how-will-trumponomics-work-out