The Effects a Second Trump Term Could Have on the Economy

Fresh off his election victory on November 6, former president Donald J. Trump will once again take up residence at Pennsylvania Avenue come January. A second term for Trump could have several potential effects on the economy, interest rates and inflation. While predicting the exact outcome is speculative and can vary depending on unknown variables, I want to touch on some key points to keep in mind.

First and foremost, anything I say in this article should not be interpreted as me supporting or opposing any policy or strategy by president-elect Trump. I will stick to the facts of what the laws of economics are predicting, and I will strive to present an unbiased view and offer differing opinions from both supporters and critics of certain policies.

Tax Cuts

One of the first items on president-elect Trump’s agenda will undoubtedly be to fulfill the promise of tax cuts he made on his campaign trail. Trump has promised to extend, or even make permanent, the tax cuts that were implemented during his first term. In 2017, during his first presidency, one of Trump’s biggest accomplishments was a major tax reform package, which included significant corporate tax cuts and individual tax reductions. The policy aimed to stimulate business investment and increase consumer spending. Supporters argue that the tax cuts helped boost economic growth in the short term by increasing disposable income and encouraging businesses to reinvest in the economy. Previous administrations would tout the concept of trickle-down economics — the idea that policies that favor the upper class initially will eventually benefit the economy as a whole — as an argument for tax cuts that seemingly benefited corporations and wealthy individuals.

However, critics contend that the tax cuts disproportionately benefited the wealthy and contributed to a rise in the federal deficit. If president-elect Trump continues to advocate for similar fiscal policies in the future, there could be both positive and negative impacts. On the one hand, lower taxes may incentivize investment and job creation, but on the other, long-term budget deficits and rising national debt could lead to inflationary pressures or interest rate hikes that dampen growth.

In addition to the previously mentioned tax cuts, while on the campaign trail, Trump also promised additional tax cuts/incentives for both individuals and businesses on things like tipped income, overtime pay and social security. Other promises made during the campaign included tax cuts for Americans living abroad and first responders and the military, as well as deductions for auto loan interest. Experts are not as confident about these items becoming a reality as the headline tax cuts Trump plans to implement.

Trade Policy and Tariffs

One of president-elect Trump’s biggest promises on the campaign trail has been his “America First” stance, and his promised tariffs on China and other U.S. trade partners. Although some of the details remain unknown, Trump has suggested a 10 percent tariff on all imported goods and a 60 percent tariff on goods imported from China. 

One of the primary goals of tariffs is to protect U.S. industries from foreign competition, especially in sectors like steel, aluminum and textiles. Domestic companies may benefit from reduced competition, potentially leading to more jobs in these industries. While some sectors may gain an advantage from tariff protection, others could suffer. For example, U.S. companies that rely on foreign-made components might face higher costs, leading to layoffs or a slowdown in hiring. Industries such as automotive manufacturing, electronics and retail could see significant negative effects due to increased production costs. Opponents of the proposed tariffs argue that the majority of the cost will get passed on to the consumer, potentially reigniting inflation concerns.

Fiscal Policy and Deficits

We’re expecting a second Trump term to include continued tax cuts, particularly on corporate and individual tax rates, which could lead to higher budget deficits, as spending outpaces revenue. A larger deficit would likely require more government borrowing, which could put upward pressure on interest rates, especially if markets begin to worry about the sustainability of U.S. debt. As the government issues more debt to fund its spending, the increased supply of Treasury bonds could lead to higher bond yields, which are closely tied to interest rates in the broader economy. If Treasury yields rise, it could increase borrowing costs for businesses and consumers.

Federal Reserve Relations

President-elect Trump has historically criticized the Federal Reserve's interest rate policies, particularly when he felt the Fed was raising rates too quickly. During his first term, Trump was highly vocal in his opposition to the Fed’s rate hikes. He repeatedly criticized the Fed for raising interest rates, arguing that they could stifle economic growth and hurt stock markets. He even suggested that the Fed’s actions could lead to a recession.

During a second term, Trump could continue to push for lower rates to stimulate economic growth. However, if inflationary pressures rise due to tax cuts or increased spending, the Fed may have less room to cut rates and may even raise them to keep inflation in check. There has been a bit of discussion about Federal Reserve chair Jerome Powell, and some have speculated that Trump may try and have him replaced with someone the incoming president may find easier to work with. Powell, in the meantime, has stated he would not step down if Trump asked and that it is "not permitted under law" for the White House to force him out.

Growth and Inflation

Trump's economic agenda could stimulate growth, particularly through deregulation, tax cuts and trade policies. Gains in U.S. equity indexes since the election reflect the markets' expectation of Trump’s policies as good for business. However, if the economy grows faster than expected, it could lead to rising inflation, which could cause the Federal Reserve to increase interest rates to keep inflation in check, or at least slow down the pace of future rate cuts. Trump's policies of deregulation and tax cuts might incentivize businesses to hire more workers, leading to a tightening labor market. If wage growth accelerates significantly, it could fuel inflation, which would likely prompt the Fed to stay higher for longer to prevent an overheating economy.

Only time will tell exactly what a second Trump term will bring. Lower taxes paired with deregulation is certainly a recipe for economic growth. We have seen both equity and fixed income markets react to the election results. As previously mentioned, equity markets have been rallying, while interest rates have been steadily increasing. Hopefully, president-elect Trump and his administration can find the right balance to keep the economy in high gear while keeping inflation under control.

Roger Heidlebaugh serves as Vizo Financial’s portfolio strategist. He acts as an investment consultant for credit unions, helping them to manage their fixed income investments, jumbo CDs and deposit accounts. On the corporate side, he analyzes, monitors and facilitates liquidity funding and investment solutions for Vizo Financial. Mr. Heidlebaugh is well-versed in the financial services industry, with over 14 years of experience as a financial advisor and expertise in managed accounts, various annuities, life insurance, investments and more.