Trump’s Policies: Fast-Moving Chaos instead of Constructive Progress

President Donald Trump is operating with remarkable speed, but the consequence appears to be a significant amount of chaos, outpacing any real progress. This whirlwind approach is projected to exacerbate existing issues related to inflation and interest rates, potentially leaving the Federal Reserve struggling to fulfill its mandate of price stability.

The Fed has opted to hold the federal-funds rate steady, scanning the economic landscape for indicators that inflation is edging towards the desired 2% target. However, the bond market’s sentiments do not align with the Fed’s optimism regarding a manageable inflation scenario. Despite the Fed having lowered the overnight borrowing rate by a full percentage point last fall, both the 2-year and 10-year Treasury rates have risen. These rates ripple through our economy, determining the costs of credit cards, auto loans, and mortgages.

Promises Made and Potential Consequences

Trump’s strategies tout a vision of combating inflation by “unleashing American energy, slashing regulation, rebalancing international trade, and reigniting American manufacturing.” Yet, there are strong arguments that these measures might do more harm than good, risking an uptick in inflation and further amplification of interest rates.

While Trump may have plans to downsize federal employment, this move may inadvertently slow the pace at which businesses can navigate regulatory hurdles. A smaller government with diminished regulations could lead to escalating costs in the private sector, effectively countering the desired outcomes of lower pricing. For instance, although simplifying the process for drilling and transporting petroleum appears attractive, the reality is that the oil industry today is more conscious of overproduction – a scenario that has previously led to substantial price dips and financial losses for the sector.

Moreover, any enhancement in the export of liquefied natural gas (LNG) under Trump’s policies shouldn’t lead to an expectation of significantly lower gasoline prices, especially when faced with ongoing economic pressures that can only be alleviated by a recession.

The Trade Deficit Dilemma

Trump’s imposition of tariffs is another component of his economic framework, yet these import taxes fail to solve the core issue of the USD 3.2 trillion trade deficit – a deficit that stands stubbornly at 3.2% of GDP. Reducing this gap requires a transformation of the relationship between government and business spending, household savings, and corporate profits. Presently, American savings levels are alarmingly low, and without significant cuts in government expenditures or increases in taxation, this situation won’t change.

Ironically, the push for innovation that companies are currently making – particularly in fields like artificial intelligence – could widen the savings gap, placing an additional financial burden on working- and middle-class families. While a portion of retail sales growth may be bolstered by upper-income households tapping into their home equity and stock market wins, this scenario cannot be a long-term strategy for sustainable economic health.

The Inflation Outlook

Tax cuts and tariffs can create an illusion of growth, but their impact on inflation can be troubling. If we assume that half of a 20% average tariff is passed onto consumers, this would contribute to a 1.1% hike in consumer prices, pushing overall U.S. inflation closer to 4%. Congressional Republicans are championing an extension of the 2017 Tax Cuts and Jobs Act, hoping to accommodate Trump’s commitment to further cuts on corporate tax rates, overtime pay, Social Security benefits, and tips. This could lead to a federal deficit swelling to as much as 8% of GDP, spurring aggregate demand but only marginally boosting supply, setting the stage for inflationary pressure and the risks associated with vigilant bond markets.

The Cycle of Inflation and Wages

Significant tariffs, coupled with retaliatory measures – such as Canada limiting energy and lumber exports to the U.S. – may indeed motivate U.S. resource development and manufacturing. Still, this comes at a cost, resulting in escalated prices. When U.S. goods imports account for about 11% of GDP, the potential for price hikes becomes tangible.

U.S. workers, under these conditions, will likely seek higher wages to offset rising living costs; meanwhile, businesses may be compelled to increase prices in anticipation of further expenses. This cycle is a feedback loop fueled by the federal deficit, which skyrocketed under both Trump and former President Joe Biden, and it has now become a significant part of our national economic landscape.

The Bottom Line

Current consumer expectations for inflation, as measured by institutions such as the Conference Board, the University of Michigan, and the New York Federal Reserve, remain stubbornly above 3%. The American public can sense the turbulence ahead, even amid reassurances from the Fed. It’s time to address these issues head-on rather than relying on the quick-fix strategies that have proven to be mere smoke and mirrors. The long-term stability of our economy depends on sound fiscal policies that rest on foundational principles rather than chaotic momentum.