U.S. President-elect Donald Trump, who campaigned on promises of aggressive import tariffs, strict immigration curbs, deregulation, and smaller government, is poised to inherit an economy that may require a more cautious approach. As he prepares to assume office next week, economic indicators suggest that restraint might be the key to maintaining stability.
With output expanding above trend, near-maximum employment levels, and inflationary pressures lingering, Trump’s proposed reforms—similar to his 2017 tax cuts—may introduce risks rather than provide needed stimulus. A recent stock market selloff following December’s strong jobs report has highlighted the economy’s sensitivity to potential policy changes.
“Success for the Trump administration would be to do no harm to the exceptionally performing economy it is inheriting,” said Mark Zandi, Chief Economist at Moody’s Analytics. “On their face, the planned combination of tariffs, deportations, and deficit-funded tax cuts will do harm. How much… depends on how aggressively these policies are pursued.”
Trump’s new term begins under different economic circumstances compared to 2017.
Inflation and Fiscal Constraints
“The constraints are different, starting with inflation,” said Karen Dynan, a Harvard University economics professor and former Obama administration official. Inflation, which remains above the Federal Reserve’s 2% target, has shown little improvement year-over-year. Additionally, Trump faces larger federal deficits, higher government borrowing costs, and an expanding labor force—a growth partially fueled by immigration, which he has pledged to restrict.
Referring to recent U.S. economic performance, Dynan noted, “If you believe the economic growth in excess of trend is from immigration, it is going to be hard to get numbers as large as we saw in the latter part of the Biden administration.”
A Changed Economic Landscape
When Trump first took office in 2017, the economy was still recovering from the 2007–2009 financial crisis. His administration’s Tax Cuts and Jobs Act provided a needed boost, and while import tariffs affected global trade, the U.S. economy proved resilient. However, the longest U.S. economic expansion ended abruptly with the onset of the COVID-19 pandemic in 2020.
At that time, inflation was subdued, mortgage rates hovered around 4%, and long-term Treasury bond yields were approximately 3%. Today, inflation remains stubbornly above target, mortgage rates are nearing 7%, and Treasury yields are around 5%—raising concerns about U.S. fiscal discipline.
“There is still a concern inflation may not be beaten,” said Federal Reserve Governor Christopher Waller. However, he also acknowledged rising concerns over fiscal deficits, warning that persistent borrowing could drive markets to demand a premium. “That is starting to be what we are seeing,” he added.
Although Trump has established an informal Department of Government Efficiency to identify savings, there is no plan to address major deficit drivers, such as senior health and retirement benefits, which remain politically untouchable.
A Strong but Vulnerable Economy
The economic data underpinning the Federal Reserve’s policies—employment, inflation, consumer spending, and growth—offer limited room for improvement without risk. The unemployment rate in December stood at 4.1%, close to sustainable levels, with a strong 256,000 jobs added. Consumer spending remains robust, supported by wage growth, while inflation has eased slightly but still exceeds the Fed’s target.
“The U.S. economy is just performing very, very well,” Federal Reserve Chair Jerome Powell remarked at a Dec. 18 press conference. However, Powell emphasized the need for continued monetary tightening to return inflation to 2% while preserving labor market strength.
The incoming administration’s expansive rhetoric contrasts sharply with current economic conditions. Federal Reserve staff have flagged potential risks, including slower growth and higher unemployment, tied to expected trade and immigration policies. Policymakers have sought to balance optimism with caution.
“Businesses themselves have been optimistic about upcoming conditions despite possible disruptions from tariffs and deportations,” said Richmond Fed President Tom Barkin. “I expect more upside than downside in terms of growth.” However, he acknowledged inflation risks and added that some policies could be adjusted if they prove damaging: “You could walk some of them back.”
The Path Ahead
Trump faces the challenge of aligning his administration’s policy agenda with the realities of an already strong but vulnerable economy. With rising concerns over fiscal discipline, inflationary pressures, and potential policy disruptions, a measured approach will be crucial to sustaining economic stability. As experts suggest, avoiding harm may be Trump’s best strategy.
