WASHINGTON (AP) — President Donald Trump has promised cheaper prices and lower interest rates, but an economy altered by the pandemic is making it harder to keep those promises.
Economic growth It is strongHealthy led Consumer spending. and budget deficits They are huge. And it might add more. Meanwhile, businesses are taking out more loans to increase their investments in data centers and artificial intelligence, which may lead to higher demand for loans and higher interest rates.
And if Trump follows through on his promise to impose broad tariffs on imports and deport millions of immigrants, economists expect inflation to rise — and it will. Less Federal Reserve Key interest rates will be cut significantly this year.
All these trends lead to higher prices, including borrowing costs For houses and cars.
But at the World Economic Forum’s annual event in Davos, Switzerland, on Thursday, Trump said, “I’m going to call for interest rates to be cut immediately, and they should be cut all over the world as well,” though he did not provide further details.
The biggest reason for the persistence of high borrowing costs is the remarkable resilience of the economy in the wake of the pandemic, trillions of dollars in government funding from Trump and former President Joe Biden, inflation and the fear of multiple rounds of recession. .
Goldman Sachs chief economist Jan Hatsius says the economy is “in the sweet spot for healthy growth.”
It has expanded at an annual rate of at least 3 percent for four of the past five quarters, the longest in a decade. Unemployment is at historic levels. low 4.1%. And in the year By 2022, inflation is at four-decade highs and most Americans are struggling with the economy. Return to 2.4%According to the preferred measure of the Federation.
And in 2021 and 2022, inflation-hit wages have risen faster than inflation in the previous 18 months, providing the necessary fuel for continued growth.
A healthy economy motivates more Americans to buy cars, homes and large utilities and businesses to invest in IT equipment and factories. Such measures are good for the economy – but the need for more credit to finance all the spending can drive up interest rates.
And continued growth can drive up prices. Netflix said companies that see healthy consumer demand may decide to charge more. Tuesday will do Number of subscribers after registration.
Such trends Trump Millions of households have saved more by putting off spending after taking out too much debt a decade ago when mortgage and credit card debt skyrocketed.
“Households have been reducing their balance sheets relative to their incomes, and that’s a very significant inflationary force that’s gone,” said Julia Coronado, president of Macropolicy Views and a former federal economist.
Today, most households carry less debt and higher-income households in particular are benefiting. Strong gains in home prices and stock market wealth. About 40% of homes are now free and clear – without a mortgage. Greater wealth can encourage continued spending on travel, electronics, and dining expenses.
In addition, high-tech companies are investing in data centers to accelerate their work on artificial intelligence. Trump announced on Tuesday A collaboration between OpenAI, Oracle and Japan’s Softbank to invest $500 billion in AI research in data centers and power plants. Before the pandemic, many companies hoarded cash and did not invest as much, which could have lowered interest rates.
“We’re in a different world,” said Joe Brusuelas, chief economist at tax advisory and consulting firm RSM. “Gone are the days of low inflation and low interest rates. In its place is a new framework of less capital and higher rates.”
As a result, Trump’s promise to stimulate the economy with tax cuts and deregulation could push prices higher as he vows to drop tariffs and immigration restrictions.
“That’s going to be inflationary, and that’s going to push (the Fed) policymakers to take tighter policies than they’d like,” said Gregory Dako, chief economist at EY. “So you’re going to be in a higher interest rate environment.”
Trump is seeking to boost oil and gas production in the US by lowering energy prices and bringing down broad inflation. This will allow the Fed to lower its key interest rate.
But that doesn’t change the reaction of financial markets, which also affect the cost of borrowing for a home or car. Since the Fed began cutting its key rate in September, the yield on the 10-year Treasury note — which has a major impact on borrowing rates — has fallen. It actually increased significantly..
Gennady Goldberg, head of U.S. price strategy at TD Securities, said investors are expecting continued strong growth, in part because of Trump’s proposed tax cuts and deregulation. In that case, the Fed will be less likely to cut its key rate.
Many investors are discounting Trump’s threat of tariffs, hoping that he will use them as leverage rather than permanent pressure on international talks.
“I think there was an expectation that President Trump would bring all the good policies and leave all the bad policies for growth,” Goldberg said.
Another trend that Trump has championed is the rise of protectionist measures around the world after two decades of globalization. This has led to a scramble by various international corporations to move their production from countries that are the target of Trump’s anger, especially from China to other countries such as Vietnam or Malaysia.
“Instead of globalization driving prices lower or at least putting pressure on them, we’re now relocating supply chains and increasing protectionist barriers,” Brucellas said. Almost all economists predict an increase in inflation, although the increase is likely to be modest.
Another change is that stubbornly high annual budget deficits also threaten to push interest rates higher, as Wall Street investors may seek higher yields to buy all the Treasury securities needed to cover the debt.
Last week, the nonpartisan Congressional Budget Office said the deficit could reach $1.9 trillion this year and rise to $2.7 trillion over a decade. Trump’s proposal to extend the 2017 tax cuts and implement new ones, such as eliminating the tax on tips, could add more deficits.
“If we don’t reduce the fiscal deficit, we will see higher long-term bond yields,” Fed Governor Chris Waller said earlier this month. And that’s what we’re starting to see.
