The Trump Administration's High-Stakes Inflation Balancing Act
Trump's mixed policy messaging may threaten disinflation efforts
As Jack just explained, inflation is kicking back up. With interest payments on the debt rising, deficit spending unchecked, and the Fed having prematurely declared victory over inflation, it was only a matter of time before inflation was back in the news.
Those who claim that this is, without a doubt, a signal that investors are worried about President Trump’s policies are not as honest as they should be. Inflation has been giving worrying signs for months. However, this will soon be Trump’s problem — and his only. If the president was elected with one clear mandate, it was to lower Americans’ cost of living. Rising inflation does the opposite: It erodes purchasing power, raises everyday expenses, and — as a result — angers voters. Few things hurt a presidency quite like an inflation outbreak (ask the Biden administration). That’s why it is imperative for the Trump administration to get its policy house in order and align its fiscal strategy with the goal of price stability.
Jack is also correct that as inflation rebounds, it’s critical to recognize that the biggest threat isn’t just loose monetary policy — it’s also loose fiscal policy. As economist John Cochrane emphasizes, “Without fiscal tightening, the Fed cannot lower inflation via higher interest rates.”
Right now, America’s fiscal stance is far from supporting disinflation. The president’s announced policies likely will have contradictory impacts on inflation. Some of his policies could help tame the inflation fires while others could fuel them. Consider the mixed messages from the White House in these areas:
Promises of Spending Cuts: The Trump administration has promised to shrink government spending through the DOGE (Department of Government Efficiency), which, if the initiative succeeds, would indeed help with the fight against inflation. As a reminder, the budget deficit now stands at $1.9 trillion and will be at least $2.5 trillion in 2035. Federal debt has ballooned and is growing on autopilot as interest payments on that debt are soaring — creating an inflationary impulse of their own. In 2025, net interest on the debt will reach $952 billion — more than the defense budget and that of many other programs. By 2035 net interest on the debt will reach $1.8 trillion, assuming lower interest and inflation rates than I fear we will have. Whatever one thinks of the DOGE approach, comments from its leader Elon Musk show that he understands that the country faces a real risk in large part due to the government’s growing interest obligations.
Deregulation: President Trump’s ambitious deregulatory agenda, if implemented, will have a positive impact on inflation by freeing supply and boosting growth. This could be significant.
Extending the Tax Cuts and Jobs Act: There is no doubt some of the TCJA provisions, if extended, will encourage investment and growth (full expensing, for instance), which in turn will help control inflation. However, the scale of the tax-cut extension, in addition to the provisions the president wants that aren’t pro-growth (no tax on tips and all that), are going to make the extension expensive in budget terms. We are talking about $7 trillion in added debt. Even if the final figure turns out to be much lower, it’s still a lot of debt if it isn’t paired with some spending cuts.
DOGE Checks: This is a terrible idea. It’s one thing to say that whatever savings DOGE produces can be used to pay for the extension of the tax cut. It’s a whole other thing to commit to sending checks to people based on spending cuts that may not materialize. We are talking about up to $400 billion in checks.
Tariffs: The president is dead set on imposing tariffs on many countries for various reasons. He has announced steel and aluminum tariffs, and, based on the first three weeks, he likely will continue threatening countries with tariffs if they don’t do what he wants them to do. Tariffs invariably raise the prices of the goods they are imposed on, and tariffs will eventually slow economic growth, which will make it harder to fight inflation. The erratic behavior of the administration is also injecting enormous uncertainty into the market. Markets don’t like uncertainty, and that will eventually slow growth even further.
Pressure on the Fed to Cut Rates: Perhaps most paradoxically, even as fiscal policy has been propping up demand, President Trump has pressured the Federal Reserve to cut interest rates. Pushing for easier money in an environment where inflation is already rising could backfire spectacularly. The Fed’s commitment to its 2 percent inflation target is critical for keeping inflation expectations anchored — I am not arguing that the Fed is doing a good job at either. Undermining this commitment for short-term political gain is a recipe for higher long-term inflation.
Whether the net effect of these policies will be an inflation boost or an inflation chill depends on which way the Administration goes in these areas. What worries me is that tariffs and other harmful actions proposed by the president are easy for him to implement on his own, whereas policies such as deregulation and sustainable spending reductions are more difficult and require congressional support. There is a non-negligible chance that we’ll mostly end up with the easy stuff, which would be bad news. I’m crossing my fingers that I’m wrong. All this is to say, inflation didn’t disappear on Inauguration Day. Americans want to see lower prices — pronto. The administration should take this reality seriously, and inflation over 3% should signal that time is of the essence to take the right actions.