Donald Trump’s re-election as US President is complicating the prospects for a “soft landing” in the US economy.
Some economists now believe that the US economy could face a surge in inflation if Trump fulfills his campaign promises.
In an interview with Yahoo Finance, Joseph Stiglitz, a Nobel Prize-winning economist and professor at Columbia University, said that the US economy is in a “soft landing” phase, but this phase could end on January 20, 2025, when Trump officially takes office.
Trump and his proposed policies are likely to cause higher inflation, as his campaign promises included high tariffs on imported goods, corporate tax cuts and immigration restrictions. These policies could put significant pressure on the already high federal budget deficit and force the Federal Reserve to reconsider its interest rate path.
Goldman Sachs economist Jan Hatzius said the biggest risk now is the imposition of comprehensive tariffs, which could have a significant impact on economic growth.
Jennifer McKeown, an economist at consultancy Capital Economics, acknowledged that inflation is at risk, mainly due to Trump’s proposed tariffs and immigration restrictions.
Tariffs were one of Trump’s most talked-about promises during the election campaign. The US president-elect has pledged to impose tariffs of at least 10% on all trading partners and 60% on imports from China. Stiglitz stressed that these tariffs would certainly cause inflation.
Minneapolis Fed President Neel Kashkari noted that the possibility of retaliation from other countries, such as a trade war, would keep inflation high in the long run.
If inflation rises, the Fed will have to raise interest rates, Stiglitz said. He said that combining higher interest rates with retaliation from other countries would slow the global economy. This would lead to the worst-case scenario: an economy that is both inflationary and stagnant or slow.
Investors have begun to adjust their expectations for Fed rate cuts. Since the first cut on September 18, the market is now expecting at least three rate cuts next year, according to the CME FedWatch tool.
The US economy has remained stable despite the rate hikes. Retail sales in October beat forecasts, GDP continued to grow steadily, unemployment hovered around 4%, and inflation fell to 2%.
Another factor to note is that it is still unclear what policies will prevail when Mr. Trump takes office in January 2025. This makes it difficult to predict the future of the US economy.
