WASHINGTON (AP) – President Donald Trump has promised cheaper prices and lower interest rates, but an economy transformed by the pandemic will make those promises difficult to keep.
Economic growth it is solidpowered by healthy consumer spending. And budget deficits they are huge and it could be even bigger. Meanwhile, companies are borrowing more to boost their investments in data centers and artificial intelligence, leading to higher demand for loans that can push up interest rates.
And if Trump follows through on his promises to impose sweeping tariffs on imports and deport millions of immigrants, economists expect inflation could worsen, making less likely the Federal Reserve will cut its main interest rate a lot this year.
All of these trends will likely keep borrowing costs higher, incl for homes and cars
However, on Thursday at the annual World Economic Forum event in Davos, Switzerland, Trump said: “I will demand that interest rates go down immediately, and they should go down all over the world, too.” although he did not elaborate.
The main reason for the likely persistence of higher borrowing costs is the surprising resilience of the economy after the upheavals of the pandemic, trillions of dollars of financial support from the administration of Trump and former President Joe Biden, an increase in inflation and several rounds of recession fears. .
Jan Hatzius, chief economist at Goldman Sachs, says the economy is “in the sweet spot of healthy growth.”
It has expanded at an annual rate of at least 3% for four of the past five quarters, the longest such streak in a decade. Unemployment is at a historic moment down 4.1%. And inflation, which soared to a four-decade high in 2022 and battered most Americans in the economy, is back to 2.4%according to the Fed’s preferred measure.
And wages, which trailed prices very poorly in 2021 and 2022, have risen faster than inflation over the past 18 months, providing the necessary fuel for continued growth.
A healthier economy encourages more Americans to borrow to buy cars, homes and major appliances, and businesses to invest in computer equipment and factories. These moves are great for the economy, but increased demand for loans to finance all that spending can also keep interest rates high.
And more steady growth could keep prices higher. Companies that see healthy consumer demand may decide they can charge more, as Netflix announced it would be tuesday after registering an increase in subscribers.
These trends are a big change from when Trump last entered the White House in 2017. At the time, the US economy was slowly emerging from a prolonged period of slow growth and very low inflation that following the painful Great Recession of 2008-2009. Millions of households cut back on spending and saved more after a debt crisis earlier in the decade led to a surge in mortgage and credit card debt.
“Households were shrinking their balance sheets relative to their incomes, and that’s a very important disinflationary force that’s not present now,” said Julia Coronado, president of MacroPolicy Perspectives and a former Fed economist.
Today, most households have less debt and higher income families in particular benefit from strong gains in home values and the wealth of the stock market. Around 40% of houses are now freehold and clear, with no mortgage. Greater wealth can spur continued spending on travel, electronics and eating out.
In addition, high-tech companies are increasing their investment in data centers to accelerate their work in artificial intelligence. trump announced on Tuesday a joint venture between OpenAI, Oracle and Japan’s Softbank to invest $500 billion in data centers and electricity generation to fuel AI research. Before the pandemic, many companies were hoarding cash and not investing as much, which can keep interest rates lower.
“We’re in a different world,” said Joe Brusuelas, chief economist at RSM, a tax advisory and consulting firm. “Gone is the era of low inflation and low interest rates. In its place is a new framework of tight capital and higher rates.”
As a result, Trump’s promises to stimulate the economy through tax cuts and deregulation, while promising to impose tariffs and immigration restrictions, could keep prices high.
“That will be inflationary, and that will push (Fed) policymakers to adopt tighter policies than they would otherwise,” said Gregory Daco, chief economist at EY. “So you’re going to be in a higher interest rate environment.”
Trump is seeking to encourage more oil and gas production in the US, with the aim of lowering energy prices and reducing broader inflation. This, in turn, would allow the Fed to lower its key interest rate.
But this does not take into account the reaction of the financial markets, which also affects the cost of borrowing a house or a car. Since the Fed began cutting its benchmark rate in September, the yield on the 10-year Treasury note, which strongly influences mortgage rates, has actually increased substantially.
Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, says investors expect continued stronger growth, driven in part by Trump’s proposals to cut taxes and reduce regulation. In this scenario, the Fed would be less likely to cut its key rate.
Many investors are discounting Trump’s tariff threats, hoping he will seek to use them as leverage in international talks, rather than impose them permanently.
“I think President Trump was expected to bring in all the good policies and leave all the bad growth policies at the door,” Goldberg said.
Another trend that Trump has helped trigger is the rise of protectionist measures around the world, after two decades of globalization. This has led to a scramble by multinational corporations to move their production from countries that are the target of Trump’s ire, especially China, to others, such as Vietnam or Malaysia.
“Instead of globalization driving down prices, or at least limiting them, we are now relocating supply chains and increasing protectionist barriers,” Brusuelas said. Almost all economists expect prices to rise, although the increase could be modest.
Another change is that stubbornly high annual budget deficits also threaten to raise interest rates, because Wall Street investors may require higher yields to buy all the Treasuries needed to finance the debt.
Last week, the nonpartisan Congressional Budget Office said the deficit this year would likely reach $1.9 trillion and rise to $2.7 trillion within a decade. Trump’s proposals to extend his 2017 tax cuts and implement new ones, such as eliminating tip taxes, could add to the deficits even further.
“If we don’t lower fiscal deficits, we’re going to see higher long-term bond yields,” Fed Governor Chris Waller said earlier this month. “And that’s what we’re starting to see.”
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