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Personal reflections by Adept Economics Director Gene Tunny

Donald Trump secured a second term in 2024, fueled by voter frustration over the cost of living under the Biden administration. While the inflation rate had fallen significantly since its 2022 peak, many Americans still felt the pain of higher prices than before the pandemic. As economist and top Trump campaign door-knocker Darren Brady Nelson shared in a recent Economics Explored interview, the economic landscape played a decisive role in voters’ choices, with many middle- and working-class Americans feeling the pinch from higher prices. 

This article explores how Trump’s economic promises and approach to the Federal Reserve may shape U.S. policy in the years ahead, particularly as inflationary pressures remain a central issue.

Inflation and the Biden Administration

Over the past few years, inflation has re-emerged as a top concern for Americans. Higher housing, food, and energy prices have affected nearly every household, driving up the cost of living. Under the Biden administration, inflation rates climbed, exacerbated by domestic policy choices such as excessive fiscal stimulus, ultra-loose monetary policy, and global economic disruptions (Figure 1).

Darren Brady Nelson noted that the Trump campaign capitalised on these economic pressures, directly addressing the cost of living crisis and questioning the Biden administration’s ability to manage it. Voters who might typically lean Democratic shifted their focus to their wallets, hoping that a change in leadership could bring financial relief. Trump’s economic message resonated particularly well in areas like Milwaukee, where Nelson worked tirelessly as the Trump campaign’s number one door-knocker in Wisconsin, encountering concerns about inflation and economic instability firsthand.

Trump’s Economic Stance and Proposed Policies

A core component of Trump’s appeal was his economic platform, focused on reducing inflation and spurring growth. His primary goals include implementing tax cuts, reducing federal spending, and boosting growth by pushing back against policies he deems overly “woke” or harmful to free enterprise. Trump is mainly pro-American business, advocating for a free-market approach with minimal government interference. This is a shift away from the more regulatory-heavy stance of the previous administration, which its critics felt was stifling economic dynamism. 

It remains to be seen how Trump will cut spending and avoid a blowout in the US federal deficit and debt due to his promised tax cuts. During the last Trump administration, tax cuts contributed to a worsening of the federal deficit over Trump’s term, even before the pandemic (Figure 2). 

Elon Musk’s involvement in the second Trump administration could introduce a bold approach to government efficiency, leveraging his technological innovation and process optimisation background. Known for his success in streamlining operations at companies like Tesla and SpaceX, Musk could bring a private-sector mindset to public administration, emphasising cost reduction, accountability, and agile problem-solving. His potential role as head of a proposed “Department of Government Efficiency” would focus on identifying and eliminating bureaucratic waste, restructuring outdated processes, and fostering a results-oriented culture within federal agencies. As Darren Brady Nelson noted, Musk’s outsider perspective could enable him to reimagine government structures, cutting through red tape and enabling quicker, more efficient responses to public needs, much like he has done in his businesses. If successful, this initiative could reshape federal operations to be leaner and more responsive, helping to fulfil Trump’s campaign promise to “drain the swamp” and reduce government excess.

Trump and the Federal Reserve – A New Approach?

One of the biggest questions surrounding Trump’s second term is how he will interact with the Federal Reserve, especially given his past criticisms of its monetary policy. Trump’s calls for low interest rates during his first term suggested that he favours a more accommodative approach to monetary policy, which could have significant implications for inflation control.

There is speculation that Trump may push for a new Fed Chair, replacing Jerome Powell, which could sway the Fed’s stance on interest rates and monetary tightening. Although the Federal Reserve is designed to operate independently of political pressures, the President’s influence over critical appointments could shift the central bank’s approach to interest rates. Trump’s priority will likely be policies supporting economic growth, which he sees as vital to maintaining his support base. However, there is a risk that keeping interest rates low could lead to even higher inflation, a concern shared by economists across the spectrum. Trump’s unpredictability means the Fed’s path forward could be less clear as the administration balances pro-growth policies with inflation control.

Trump’s potential impact on the Fed was one of the issues I discussed with Darren Brady Nelson in our Economics Explored interview. An excerpt is available in the embedded YouTube video below.

Will Trump’s Policies Increase Inflation Risk?

The prospect of continued low interest rates under Trump has economists speculating about the long-term impact on inflation. While popular among supporters, Trump’s pro-growth policies might inadvertently stoke inflation if they fuel demand in an already constrained economy. However, Trump and his supporters believe that the benefits of economic growth, driven by a robust private sector, could counterbalance inflationary pressures. According to Nelson, the administration’s focus will likely remain on getting Americans back to work, lowering taxes, and reducing federal spending. 

In his previous term, Trump managed to maintain relatively low inflation, as shown in Figure 1 above. Still, there is no guarantee inflation will stabilise at the Fed’s 2% target, especially if the Trump administration can’t repair the budget and instead increase the deficit.

Trump’s Trade Policy is Another Economic Risk

Trump’s trade policies carry significant economic risks, particularly in inflation and consumer prices. By imposing tariffs on imported goods, particularly from China, Trump aims to boost domestic manufacturing and reduce dependency on foreign producers, especially in strategic sectors like steel and technology. However, these tariffs increase costs for U.S. consumers and businesses that rely on imported materials and components, potentially leading to higher production costs that companies pass on to consumers. This “imported inflation” can drive up prices across sectors, from consumer goods to construction materials, further straining household budgets. Additionally, retaliatory tariffs from trading partners could disrupt American exports, harming industries that depend on international markets and leading to job losses. 

While Trump’s trade policies may protect specific industries in the short term, the broader economic impacts—higher costs, reduced consumer purchasing power, and potential trade wars—could limit growth and exacerbate inflationary pressures, challenging the goal of achieving long-term economic stability. Incidentally, renowned Australian economist Warwick McKibbin has undertaken comprehensive economic modelling of the potentially adverse effects of Trump’s trade policies (see The International Economic Implications of a Second Trump Presidency). 

Trump’s trade policy could adversely impact Australia by reducing global demand for Chinese products and, hence, Australian-produced commodity inputs (e.g. iron ore and coal). According to Australian Treasury modelling, reported by Michelle Grattan at The Conversation: 

“Donald Trump’s trade and tariff policy would bring a small reduction in Australia’s output and extra price pressures, especially in the short term…

But our flexible exchange rate and the independence of the Reserve Bank would help mitigate some of the effects.”

Ultimately, it remains to be seen whether Trump will impose the threatened general 10% tariff and a China-specific tariff of 60%, so we will have to wait and see what happens. 

Long-Term Economic and Policy Implications

As Trump begins his second term, his administration’s policies could profoundly impact the U.S. economy, particularly regarding inflation control, job creation, and fiscal discipline. Trump’s team seems prepared to cut taxes and reform government administration, but it remains to be seen how successful they will be in restraining spending growth. To the extent they fail to reduce the deficit, Trump’s fiscal policies could lead to clashes with the Federal Reserve over monetary tightening, potentially igniting debates on the balance between economic growth and inflation control.

For Trump supporters, the shift toward a more robust and free-market-oriented economy is promising. However, Trump’s economic agenda also brings uncertainties, especially inflation. Balancing pro-growth policies with inflation control is necessary to ensure that Trump’s second term meets the expectations of a nation weary of economic instability.

In summary, Trump’s win was undoubtedly fueled by inflation and economic concerns, with the promise of change offering hope to his supporters. While his approach to the Federal Reserve and inflation will face challenges, Trump’s bold stance on economic growth and government reform has set the stage for a new era of U.S. economic policy.

Published on 11 November 2024. For further information, please email us at contact@adepteconomics.com.au or call us at 1300 169 870.