A combination of diverse factors, including interest rates, inflation, the fiscal sustainability crisis and judicial and political resistance, may reduce the flexibility of U.S. President Donald Trump’s economic policies.
On his first day in office, U.S. President Donald Trump implemented economic policies on tariffs, energy and deregulation that have since become central to current market fluctuations and represent the biggest variables in economic operations.
Notably, the current evolving economic and financial environment is different from that of Trump’s first term. The combination of diverse factors, including interest rates, inflation, the fiscal sustainability crisis, judicial and political resistance and countermeasures of domestic and foreign economic entities, may reduce the flexibility of his economic policies.
High interest rates and inflation
When Trump launched his trade war in the first term, U.S. interest rates were near zero and inflation was low. However, the current scenario is markedly different, with strong demand, supply chains vulnerable to geopolitical conflicts and lingering memories of inflation. Today, interest rates, which remain high, threaten to weaken the effect of tax cuts and increased spending, while exacerbating inflation.
At the same time, inflationary factors have changed. Trump’s tariffs, immigration restrictions and other policies may push up production costs and prices, leading to continued inflation. As the Federal Reserve is forced to delay interest rate cuts, the economy faces the dual challenges of high interest rates and high inflation. Trump’s re-election was largely driven by economic factors, as voters rejected the outcomes of the Biden economy, especially rising inflation and falling real incomes. Therefore, if Trump’s image as an enemy of inflation falls apart, voters may similarly reject the results of his economic policies.
The fiscal sustainability crisis
In 2017, when the Republicans controlled both the U.S. Senate and House of Representatives, the federal deficit and the public debt accounted for 3.6 percent and 77 percent of GDP, respectively. Today, the figures have risen to 6.4 percent and 93.6 percent. The federal debt has exceeded $36 trillion, with nearly $3 trillion in national debt maturing this year.
In fiscal 2024, the government’s net interest expenditure reached $882 billion and is expected to exceed $1 trillion in 2025, or 3.4 percent of GDP. At present, Trump’s top priority is to address the debt ceiling, along with the possibility of a government shutdown or debt default potentially resulting from his failed negotiations with Congress.
This also means that the tension between Trump’s tax cuts and the budgetary deficit will grow. While the extension of personal tax cuts can bring about moderate short-term growth, it risks reducing long-term revenue. It is expected that by 2033, short-term growth will be offset by higher budget deficits. Trump’s tariff policies may not only drive inflation and offset the effects of tax cuts but could lead to policy inefficiencies.
Legal and political resistance
As a result of the legal and political resistance that Trump faces, it remains difficult to repeal or even readjust existing legislation. Even with Republican control of both houses of Congress, Trump may not have free rein because he lacks absolute control over the Republican Party at present. For example, Republican senators elected John Thune as the Senate Republican leader, not Florida’s Rick Scott who clearly leans toward Trump. This decision indicates that some members may try to assert their independence.
During his first term, Trump tried to overturn Obamacare but failed because Republican Senator John McCain refused to support the move. Similarly, Trump’s promised infrastructure plan was aborted in the early stages. Currently, Trump is aiming to weaken the Inflation Reduction Act and reclaim funds allocated to clean energy, such as electric vehicles. But this would require new legislation. Since the Republicans have relatively limited influence in the House and many Republican constituencies have benefited (or will benefit) from IRA-supported projects, passing such a bill may be difficult.
In addition, there are internal contradictions and factional conflicts between members of Trump’s economic team. This infighting first emerged during the process of cabinet formation, when various groups competed for positions and attacked each other at Mar-a-Lago. The economic team includes both “stabilizers” — professionals capable of balancing Trump’s policies within the government — and “destroyers,” who may cause chaos or exacerbate disputes. There are also Wall Street representatives who can reassure the market, as well as Jamieson Greer, an international trade law expert who clearly supports Trump’s tariff policy, and Russell Vought, director of the White House Office of Management and Budget, who advocates presidential centralization.
Whether Trump can coordinate these competing perspectives or end up provoking conflicts is unknown. For business insiders, the Wall Street faction may not change the tariff policy, but it is more open to international negotiation, which potentially allows for a gradual and less destructive implementation.
When it comes to tariff negotiations, however, the Wall Street faction and tariff opponents may have different demands and negotiation strategies. In addition, the intertwined business and financial backgrounds and interests of many team members raise concerns about their ability to fully separate these interests from government affairs. This sort of entanglement could lead to conflicts of interest and weaken the effectiveness of the Trump administration’s negotiation strategies with other countries.
In conclusion, Trump’s economic policies in his second term face multiple obstacles. They suffer from internal contradictions and their economic impact could fall short of expectations. At the same time, their implementation may be hindered by the administration's internal frictions and political constraints.
