By Blerina Uruci, chief US economist at T. Rowe Price
The new US president, Donald Trump, is inheriting an economy growing robustly. While inflation remains above the Federal Reserve’s 2% target, it has come down materially from the peaks of 2022. However, the fiscal deficit is high and is projected to reach 7% of GDP by the end of 2024. This would be the highest level ever during peacetime and outside of a recession.
Although debt service costs are high – currently more than 2% of GDP each year – there were no signs during the campaign that lowering the deficit would be a priority of the new president. Therefore, any improvement on this front seems unlikely.
With respect to economic growth, all eyes are on what happens with the Tax Cuts and Jobs Act (TCJA). While an extension of expiring provisions could support the economy, the net effect could end up being neutral overall if it means that parts of the Inflation Reduction Act (IRA) are changed to help fund it. Additional corporate tax cuts are likely to be difficult to get through given that there is limited fiscal space to increase the deficit further. If they are delivered, it could be positive for growth. However, any positive effect could be offset by uncertainty around tariffs.
On the inflation front, raising existing tariffs and/or imposing additional levies on imports could cause a one-off price shock. The magnitude would depend on the ability of businesses to pass these higher costs along to consumers, which is hard to predict.
Another area to watch is the new president’s vow to tighten immigration policies. Immigration policy risks skew toward higher labour costs and slower growth, but the final effect will depend on the scale and pace of reduction in migrant flows. I think this is the most underappreciated policy by the market. Over the past few years, significant net migrant flows have increased labour supply in the US and helped cool an otherwise very hot labour market. Faster labour force growth pushed down wage inflation and boosted overall growth by increasing aggregate demand. Curbing migrant flows would likely have the opposite effect on wages and growth. However, there is significant uncertainty about the timing and extent.
As for the Federal Reserve, policy is likely to stay the course in the near term, but the outlook for 2025 is more uncertain. Traditionally, the Fed will incorporate fiscal policy once it has been announced by the executive branch. With that in mind, during the December meeting, we would expect the FOMC to recognise increased uncertainty about the economic and inflation outlooks, which would feed through to the future path of monetary policy. The March 2025 forecasts presented by the FOMC will likely be the first opportunity to fully incorporate the new president’s policies into its outlook. While firing the current Fed chair seems unlikely, the Fed Chair nomination in May 2026 will be hand-picked by Trump and have a dovish tilt.
Overall, it is important to be cautious about the long-term implications of the new administration’s economic policies. The measures eventually adopted could be very different from those promised during the campaign, and there is a lack of detail about costs and implementation. So, uncertainty is likely to remain high in the meantime. I remain positive on near-term growth, but a sharp tightening in financial conditions would dislodge the economy from its current positive equilibrium and make me downgrade my view.
