After Trump’s Win, What’s Next for the U.S. Economy?
How policies enacting the president-elect’s campaign promises would impact inflation, interest rates, the U.S. economy, and global markets.
As President-elect Donald Trump prepares to return to the White House, S&P Global Ratings Economics is evaluating the potential economic implications. Forecasting remains challenging amid significant uncertainty about the timing, magnitude, and interactions of proposed tariffs, immigration reforms, tax cuts, and regulatory shifts. We will firm up changes to our U.S. macroeconomic forecasts over the coming weeks.
For now, here is what we are thinking:
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Uncertainty Ahead
The Trump campaign laid out several major policy proposals, including:
- A substantial increase in U.S. tariffs on imports—for example, a 10 percent to 20 percent universal tariff excluding China, a 60 percent to 100 percent tariff on China, and renewed threats of tariffs on Mexico;
- Immigration curbs, including mass deportations;
- Lower corporate taxes for companies that produce in the United States—falling from the current 22 percent to 15 percent;
- Challenges to the Federal Reserve’s long-held independence; and
- Incentives for greater use of fossil fuels through regulatory rollbacks and scaling back of renewable energy policies, including tax credits.
However, the Trump campaign has not released details on how these policies will be structured or enforced, so calibrating any cost or economic projections is highly uncertain and difficult at this point. On trade and immigration policies, it’s particularly challenging to predict how hard or fast the president-elect will push campaign promises.
Any changes to fiscal policy that the Trump administration implements are likely to take effect after late 2025.
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Tax Cuts and the Economy
We do not anticipate tax cuts will meaningfully lift the economy’s long-run potential. Conceptually, a lower tax rate would reduce the user cost of capital for some industries and lead to higher investment. But any tax cuts at this stage of the economic cycle—where the output gap is positive—would produce a smaller boost to growth than they would when there is slack in the economy. Fiscal multipliers of growth from greater stimulus are simply smaller at this point in the cycle.
History suggests that lower corporate taxes would be more likely to boost dividends and stock buybacks than investment. Moreover, the negative growth impact—that is, the drag on labor supply—of slower immigration could more than offset any marginal positive growth impulse of capital deepening.
Tax cuts in the near future would not have much effect on the economy as a whole.
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Inflation and GDP Growth
President-elect Trump’s proposed economic plan, taken at face value, would add to inflation and dent GDP growth relative to our baseline outlook. The consumer price level would be higher in the first 12 to 18 months of tariff implementation—although that would be a one-off shift in prices, rather than having an ongoing inflationary effect.
The Fed would likely react by slowing down its current policy easing with an eye on inflation risks, given its experience of inflation persistency in 2021 and 2022, when the Fed argued that supply-side inflation shock would be short-lived. Thus, the impact on interest rates would likely be a higher federal funds rate than previously expected. Higher short-rate expectations and term premium (amid higher inflation and interest rate uncertainty) would result in a higher benchmark 10-year Treasury yield over the next year.
Assuming higher interest rates and in-kind retaliation from trading partners, global financial markets would likely become more risk-averse. Meanwhile, erosion of purchasing power from inflation would likely offset any economic benefit of tax cuts, potentially resulting in a net drag on output and job creation.
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Market Outlook
Once past their initial response to the U.S. election, the global financial markets are likely to become cautious (resulting in higher volatility), given the potential policy uncertainties. Timing matters when it comes to the interaction between tariffs and business sentiment. A boost to business sentiment may be short-lived once tariffs come into view. Global financial markets would likely have a “risk-off” response to tit-for-tat tariffs and more restrictive interest rates, resulting in tighter financial conditions.
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Long-Term Risks
Over the longer term, if spending cuts don’t counterbalance tax cuts and our assumption of no increase in growth dynamics holds true, the federal budget deficit would likely increase. This would likely lead to reduced national savings and higher interest rates. Barring heavy spending cuts, we expect the United States’ debt-to-GDP ratio to rise above an already elevated projection, with interest costs consuming an ever-higher share of the federal budget.
At the same time, any flare-up in investor concerns about fiscal sustainability could meaningfully increase the term premium on bond yields. Our current forecast assumes a steady-state 3.4 percent U.S. 10-year Treasury yield, reflecting a 1.1 percent real neutral rate, 2 percent long-term inflation target, and 30 basis point (bps) term premium.
The unwinding of central bank balance sheets over the coming quarters is the main factor in the expected increase in the term premium, to roughly 30 bps higher than today’s estimate by the New York Fed’s Adrian, Crump, and Moench model.
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Executive Actions
The president has more freedom with executive actions when it comes to trade and immigration. Legal scholars continue to debate whether tariff threats are legally implementable via executive action, but our sense is that they can fall within “emergency” powers at the president’s disposal. President-elect Trump sees tariffs as a negotiation tool, even if certain countries and goods will be exempt.
Meanwhile, given an already meaningful slowdown in unlawful border crossings after Biden’s 2024 executive actions, immigration curbs may end up smaller in scale, and phased in, than Trump indicated on the campaign trail. That would likely mean a smaller negative impact on growth compared with the trend predicted earlier in the year.
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Legislative Challenges
The ability to pass new legislation depends on the makeup of Congress and the extent of deficit fatigue among legislators. It’s still too early to tell who will win control of the House of Representatives. Republicans have captured the Senate, but even if they also hold the House, passing new legislation may not be easy if they have a slim majority. Moreover, deficit fatigue—resistance to continuing to grow the deficit, especially at full employment—could limit legislators to simply extending the tax cuts in the 2017 Tax Cuts and Jobs Act, which is due to expire at the end of 2025, but making no additional tax law changes.
Moreover, even with a Republican sweep, rolling back President Biden’s climate and infrastructure policies could prove difficult, since Republican states have been major beneficiaries of the Inflation Reduction Act (IRA), CHIPS Act, and Infrastructure Investment and Jobs Act. Still, that doesn’t rule out the possibility of partial repeals, particularly for the IRA, which could include capping or shortening the duration of availability for some tax credit incentives, eliminating the individual electric vehicle tax credit, and reversing regulations on emission standards.
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