Trumponomics

How will Trumponomics work out? Economist Olivier Blanchard is skeptical that Trump’s promised policies of tariffs, business tax cuts, and deporations will lead to the results Trump is hoping for. However, he is also not predicting catastrophe, unless the Fed’s independence is compromised.

Blanchard argues that tariffs would shift US consumer demand from foreign to domestic goods, which, given that the US economy is already at full employment, would put upward pressure on prices. The Fed would likely respond by maintaining elevated interest rates. The dollar would strengthen, which would undo some of the impact of tariffs. Other countries would likely do retaliatory tariffs, which would hurt US exports further. Both imports and exports would fall, and it’s unclear whether the US trade balance would improve.

Large-scale deportations would also have problematic consequences. Blanchard believes the job market would tighten, putting upward pressure on inflation, and the Fed would likely raise interest rates, strengthening the dollar. Blanchard suggests that the inflationary impacts of mass deportations would be large enough that Trump will choose to make deportations more symbolic than widespread.

Tax cuts, which are likely to pass, will mean fiscal expansion in a time of already high deficits and full employment. Such policies will put upward pressure on inflation, leading to higher Fed policy rates and a stronger dollar.

If, as Blanchard predicts, Trump policies on tariffs, deportations, and taxes leads the Fed to pursue restrictive monetary policy, the question is how Trump responds to the Fed. He can replace Fed Chair Jay Powell and another board member slot opens in 2026, but there’s enough holdover voting members to stymie a Trump request for lower interest rates. And if Trump succeeds in pressuring the Fed into a low rate regime, inflation is likely to rise, and markets may react badly to a perceived loss of Fed independence. Overall, Blanchard speculates that Trumponomics may have an initially positive impact on an already strong economy, but that the gains made are likely to fizzle or even reverse over time. 

JMS Capital Group Wealth Services LLC

417 Thorn Street, Suite 300 | Sewickley, PA | 15143 | 412‐415‐1177 | jmscapitalgroup.com

An SEC‐registered investment advisor.

This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument or investment strategy. This material has been prepared for informational purposes only, and is not intended to be or interpreted as a recommendation. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice.