WASHINGTON (AP) — President Donald Trump has promised to lower prices and lower interest rates, but the way the pandemic has transformed the economy will make it difficult to keep those promises.
economic growth It’s soliddriven by health consumption expenditure. and budget deficit It’s huge And it could get even bigger. Meanwhile, companies are increasing borrowing to shore up investments in data centers and artificial intelligence, leading to increased demand for loans as interest rates rise.
And economists predict that inflation could worsen further if President Trump follows through on his promises to impose broad tariffs on imports and deport millions of immigrants. Federal Reserve unlikely The main interest rate will be significantly lowered this year.
All of these trends are likely to continue to push borrowing costs higher. household use And a car.
But on Thursday, at the World Economic Forum’s annual event in Davos, Switzerland, President Trump said, “We demand an immediate reduction in interest rates. Interest rates should similarly fall around the world,” but no further. Details were not disclosed.
The biggest reasons why higher borrowing costs are likely to persist are the disruption of the pandemic, trillions of dollars in government funding from Trump and former President Joe Biden, soaring inflation and fears of multiple recessions. This is the remarkable resilience of the economy since then. .
Jan Hatzius, chief economist at Goldman Sachs, said the economy is “in a healthy growth sweet spot.”
It has expanded at an annual rate of at least 3% in four of the past five quarters, the longest such streak in a decade. Unemployment rate is at historic levels low 4.1%. And inflation, which rose to a 40-year high in 2022 and worsened the economy for most Americans, Return to 2.4%according to the Fed’s preferred measures.
Additionally, wages, which closely tracked prices in 2021 and 2022, have risen faster than inflation over the past 18 months, providing the necessary impetus for continued growth.
A healthy economy is encouraging more Americans to borrow money to buy cars, homes and large appliances, and companies are investing in IT equipment and factories. While such a move would be great for the economy, the increased demand for loans to finance all spending could also keep interest rates elevated.
And if growth becomes more stable, prices could rise further. As Netflix announced, companies that see healthy consumer demand may decide it’s okay to charge them extra. It would be better to do it on Tuesday After I signed up, my subscribers skyrocketed.
This trend is a big change from 2017, when Trump last entered the White House. At the time, the U.S. economy was slowly emerging from a long period of low growth and ultra-low inflation following the painful Great Recession of 2008-2009. After binge drinking at the beginning of 2010 left them with mortgage and credit card debt, millions of households cut back on spending and increased savings.
“Households are shrinking their balance sheets relative to their incomes, which is a very significant disinflationary factor that we don’t have right now,” said Julia Coronado, president of Macro Policy Perspectives and a former Fed economist.
Most households now have less debt, and high-income households are particularly benefiting. Significant increase in home values and stock market wealth. Approximately 40% of homes are currently owned free and clear without a mortgage. Increased wealth can lead to more ongoing spending on things like travel, electronics, and eating out.
Additionally, tech companies are increasing their investments in data centers to accelerate their artificial intelligence efforts. playing cards Announced on Tuesday A joint venture between OpenAI, Oracle, and Japan’s SoftBank will invest $500 billion in data centers and power generation to accelerate AI research. Before the pandemic, many companies were hoarding cash and investing less, which could keep interest rates low.
“We’re in a different world,” said Joe Brusuelas, chief economist at tax advisory and consulting firm RSM. “The days of low inflation and low interest rates are over. In their place will be a new framework characterized by scarce capital and higher interest rates.”
As a result, prices could continue to rise, as President Trump has promised to stimulate the economy through tax cuts and deregulation while also imposing tariffs and immigration restrictions.
“Inflation will rise and (Fed) policymakers will be encouraged to adopt tougher policies than they normally would,” said Gregory Daco, chief economist at EY. “So you’re going to be in a higher interest rate environment.”
President Trump is seeking to expand oil and gas production in the United States with the goal of lowering energy prices and curbing widespread inflation. That would allow the Fed to lower its key interest rate.
However, this does not take into account the reaction of financial markets, which also affects the cost of borrowing money for homes and cars. The yield on the 10-year Treasury note, which has a big impact on mortgage rates, has fallen since the Fed began lowering its key interest rate in September. It actually went up significantly.
Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, said investors expect continued strong growth, helped in part by President Trump’s tax cuts and deregulation proposals. In that scenario, the Fed would be less likely to lower its key interest rate.
Many investors are downplaying President Trump’s tariff threats, hoping that he intends to use them as leverage in international negotiations rather than imposing them permanently.
“I think there was an expectation that President Trump would put in place all the good policies to promote growth and leave all the bad policies alone,” Goldberg said.
Another trend President Trump helped spark is the rise of protectionist measures around the world after two decades of globalization. This has led multinational companies to scramble to move production from countries that have drawn Trump’s ire, particularly China, to other countries such as Vietnam and Malaysia.
“Rather than globalization lowering prices or at least imposing price constraints, we are now repositioning our supply chains and raising protectionist barriers,” Brusuelas said. Ta. Almost all economists expect this to lead to higher prices, but the increase may be modest.
Another change is that stubbornly high annual budget deficits could lead to higher interest rates as Wall Street investors may demand higher yields to buy all the Treasury securities needed to finance the debt. This means that it is also a threat to
The nonpartisan Congressional Budget Office announced last week that the budget deficit is likely to reach $1.9 trillion this year and widen to $2.7 trillion in 10 years. President Trump’s proposal to extend the 2017 tax cuts and implement new cuts, such as eliminating the tax on tips, could further widen the budget deficit.
“If we don’t reduce the deficit, long-term bond yields are going to rise. And we’re starting to see that,” Federal Reserve President Chris Waller said earlier this month.
