'Flashing a warning': Economist says Trump's plans leading to 'a terrible outcome'

Most of Donald Trump's economic policies – such as tariffs, additional fiscal stimulus and mass deportations – are expected to add to inflation, according to a new analysis.

The inflation rate has declined rapidly since peaking at 9.1 percent in the summer of 2022 but remains above the Federal Reserve’s target at 2.9 percent, and comments from the central bank's December policy meeting indicate there will probably be more inflation, according to economist and market strategist Rebecca Patterson in a column for the New York Times.

“All participants judged that uncertainty about the scope, timing and economic effects of potential changes in policies affecting foreign trade and immigration was elevated," read the minutes from last month's Federal Reserve meeting. "The risks around the inflation forecast were seen as tilted to the upside.”

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With higher inflation, the central bank would find it harder to cut rates, and financial markets have cut their expectations of Fed cuts in 2025, and analysts are also concerned the new administration will increase the budget deficit.

"Even before any new stimulus this year, the Congressional Budget Office has estimated the budget deficit will widen from $1.9 trillion in 2025 to $2.7 trillion by 2035," Patterson wrote.

"The Treasury will need to increase the amount of bonds it issues to fund bigger deficits," she added. "The Fed is also selling its own stock of bonds left over from post-financial crisis rescues, which adds to the need to find willing Treasury buyers. Many potential overseas buyers are set to face increased tariffs from the United States and may prefer investment options outside America. Economics 101 tells us that more supply without corresponding demand pushes down prices. In the case of bonds, lower prices mean higher yields. Investors are saying, essentially, they want to be paid more to hold America’s debt."

Families would feel the hit quickly if that happens.

“The repercussions reverberate through all aspects of our economy,” said John Williams, president of the New York Federal Reserve. “Housing affordability affects the ability of communities to attract businesses, and it affects the ability of employers to attract and retain workers and grow their businesses.”

All those factors could be bad news for 401(k) plans, and borrowing costs could go up at the same time as their share prices are declining – which risks a negative feedback loop.

"There is a more benign scenario in which rising term premiums and higher bond yields can occur alongside appreciating equity markets, in which case savers benefit and borrowers’ challenges are more manageable," Patterson wrote. "Instead of inflation or supply concerns, it’s expectations for robust longer-term growth prospects that lift the term premium."

That might have happened last fall, when the S&P 500, term premium on a 10-year Treasury and the bond yield all rose at the same time, even after the Federal Reserve cut the short-term interest rate, which Patterson said could have reflected expectations that Trump would boost growth with economic deregulation without boosting inflation.

"That wouldn’t be a terrible outcome," Patterson concluded. "It’s going to be up to the new administration, as it starts executing policy, to help determine whether we get a term premium that’s optimistic or worrying. Targeted, limited tariffs and an equally limited increase in the deficit, combined with notable progress on deregulation, may be the best we can realistically hope for."