Trump’s economic proposals would increase inflation and interest rates, economist Mark Zandi says

Former President Donald Trump’s reelection and the Republican Party’s sweep of the Senate and House will result in meaningful changes to economic policy and, therefore, to the economic outlook.

Trump laid out his economic policy agenda in broad terms on the campaign trail. Based on his first term as president, he will pursue policies consistent with his campaign rhetoric, albeit not to the degree that he articulated them during the campaign.

He will also implement these policy changes quickly after being sworn in. Unlike his first term, when it took him nearly all of his first year to assemble an administration and begin implementing his policies, Trump is ready to go this time.

Arguably, the most significant economic policy change Trump has proposed would be the adoption of higher, broader-based tariffs on imports to the U.S. On the campaign trail, he talked about an across-the-board tariff of 10% or even 20%, as well as 60% on imports from China, and 100% or more on certain products.

Talk of tariffs this high is likely political bluster. However, it would not be surprising if tariffs are significantly increased on China and other countries that have benefited from the diversion of Chinese trade due to existing tariffs. Trump has also called out other potential targets for higher tariffs, including the European Union, Japan, and Korea.

As with the tariffs imposed in Trump’s first term, U.S. consumers will bear the brunt of the cost because the new round of tariffs will mean higher prices on imported goods. While foreign producers will also feel the fallout, as will U.S. distributors and retailers, the consumer far and away suffers most.

Moreover, the tariffs will likely cost U.S. jobs., partly because most countries facing the higher tariffs will respond by imposing their own higher tariffs and other trade restrictions on goods produced here. U.S. manufacturers and farmers will suffer, as they did in Trump’s first term, forcing them to pull back on their payrolls.

Trump is also set to crack down on the nearly 12 million undocumented immigrants estimated to be already living in this country. He won’t be able to deport all these immigrants since the logistics of mass deportation on this scale are not feasible. Still, the new Trump administration is likely to pursue deportations aggressively.

A wide range of industries that rely on immigrant labor will be affected. The construction trades are a good example. Close to one-third of these workers are immigrants. If many of them are forced to leave their jobs and the country, it will significantly disrupt housing construction and other building as labor shortages are already endemic.

Mass deportation could also meaningfully disrupt agriculture, manufacturing, transportation and distribution, retail, leisure and hospitality, and child and elder care.

Promises of tax cuts were also an important part of Trump’s reelection bid. He has promised to extend the individual tax cuts passed in his first term and talked about more cuts to the corporate tax rate.

It is unclear how the tax cuts will be paid for — and thus it is unlikely they will be. Revenues raised from the higher tariffs will help defray their costs, but the tax cuts will be deficit-financed in significant part.

New corporate tax cuts will provide some lift to long-term growth, but judging by the modest boost from Trump’s much larger first-term tax cuts, they will be on the margin and take years to play out. Most immediately, with the economy at full employment, the fiscal stimulus provided by the deficit-financed tax cuts will add to inflation.

President-elect Trump has also publicly ruminated that the president should have input into the Federal Reserve’s interest rate policy decisions. While directly abridging the Fed’s independence cannot be done without legislation — and that would be a big stretch — it can be done indirectly through the appointment of Fed officials. One is the Fed chair, a position that will open no later than spring 2026.

There is no issue as long as the Fed is cutting rates as it is doing now. The problem will be when the Fed should raise rates, but the president feels this is not in his political interest. Indeed, historically, when the central bank’s independence is impaired, it ultimately leads to too-easy monetary policy and higher inflation.

The sum of Trump’s economic policies will result in some combination of higher inflation, higher interest rates, and diminished economic growth.

Financial market reaction to the election results is consistent with this outlook. Most significantly, long-term interest rates have risen sharply since Trump’s victory, reflecting expectations for higher inflation and more government debt.

The stock market is also up. But this mostly reflects expectations for a lower corporate tax rate; less regulation of financial services, fossil fuels, and technology industries; and a more relaxed view of mergers and acquisitions under the incoming Trump administration.

Of course, the degree to which the economy is impacted depends on the precise policies that are implemented and their timing. It also depends on how Trump responds to financial market and business leaders’ feedback. He showed a willingness to pivot on policy in his first term, notably on tariffs, if it appeared they were doing damage to investor sentiment and the economy.

President-elect Trump ran for reelection based on a policy agenda designed to shake things up. He was transparent about this during the campaign, and he won the election handily. I’m skeptical that this will play out well for the economy, but we will learn soon enough.