Key Takeaways:
– Trump’s economic strategies like tariffs may add to inflation
– Inflation currently stands at 2.9%, above the Federal Reserve’s target
– The new administration’s policies might lead to an increased budget deficit
– A surge in bond supply may downshift prices, resulting in higher yields
– This scenario could hurt 401(k) plans and increase borrowing costs
In new findings, it seems that some of Former President Donald Trump’s economic decisions such as tariffs, extra financial stimulus, and mass deportations might contribute to rising inflation. Let’s break down what this might mean for you and your wallet.
Trump’s Policies and Inflation
Economist and market strategist Rebecca Patterson points out that while the inflation rate has fallen since hitting 9.1% in the summer of 2022, it still sits at a concerning 2.9%. This figure exceeds the Federal Reserve’s target and suggests more inflation could be on the horizon.
Last month, fellas at the Federal Reserve expressed worries about changes in foreign trade and immigration policies. They believe that these changes add uncertainty and could cause inflation to rise. Swings in inflation can make life more expensive for you and your family. They also make it harder for the central bank to lower interest rates.
Budget Deficits and Financial Markets
Now, let’s talk budget deficits. This is where the government spends more than what it earns. Financial analysts worry that the new administration might jack up the budget deficit.
According to Patterson, without considering any new stimulus, the Congressional Budget Office predicts that the budget deficit will stretch from $1.9 trillion in 2025 to a whopping $2.7 trillion by 2035. The Treasury will have to issue more bonds to cover these bigger deficits.
The Impact on Bonds and Borrowing Costs
But here’s the problem – an excess of bonds could lower their prices if there’s not enough demand. Imagine having a stall full of apples but not enough buyers. You’d likely need to drop your prices to get rid of them. Similarly, when there are too many bonds and not enough buyers, prices fall and yields – the return investors make on their bond investments – go up. What does this mean for your everyday life? If the bond yield rises too high, it could impact your parents’ 401(k) plans and make borrowing money more expensive.
The Influence on Housing and Businesses
John Williams, president of the New York Federal Reserve, highlights that a change in inflation can affect all aspects of our economy, including housing. If house prices rise thanks to inflation, communities might find it harder to draw businesses, and companies could struggle to attract and keep workers. For teenagers aspiring to buy a home or start a business, this scenario might seem frightening.
The Role of Future Policies and Growth Prospects
According to Patterson, governement strategy could influence the direction of what is called the ‘term premium’, which represents the extra gain investors expect when locking their money into a long-term investment compared to a series of short-term ones. If the term premium increases due to expectations of strong, long-term economic growth, savers could benefit, and borrowers might find their challenges are easier to manage. However, if it increases because of worries about inflation or a surplus bond supply, that’s bad news.
Last fall, we saw a positive scenario. The S&P 500, the term premium on a 10-year Treasury, and the bond yield all rose together. This was after the Federal Reserve lowered the short-term interest rate, which might have shown that people expected Trump to stimulate growth without triggering inflation.
In general, the path our economy takes depends a lot on the administration’s policies. Things like limited tariffs, a small increase in the deficit, and progress on deregulation could be our best bet for now. But in the rollercoaster journey of the economy, remember to buckle up and always be prepared for changes.