As the United States enters another 4 years under President Donald Trump, the country is expected to enter a “Golden Age” of economic prosperity. In the last few years, the country has been suffering from high inflation, and President Trump declares he will fight inflation by “unleashing American energy production, slashing regulation, rebalancing international trade, and reigniting American manufacturing.” Trump has promised corporate tax cuts, blanket tariffs, and energy expansion. Though on paper it sounds promising, many people are concerned with his tariffs, highlighting that they will inevitably bring inflationary pressures which the Federal Reserve has fought to keep under control. At the same time, Trump has also assured that the Fed will listen to his advice to cut rates, a method popularly used to fight inflation.
Even with this looming threat, the stock market has risen 6% since the election. The friendly nature of Trump towards businesses and his promise for tax cuts and deregulation have powered the bull run.
On the other hand, the bond market has been much more skeptical. Last week the Fed announced on Wednesday that they would hold off from cutting interest rates until there is a full scope of the policies enacted by the Trump Administration and how they could potentially affect consumer prices. Now, the US 10 Treasury Note yield has increased significantly from 3.75% in October to now 4.54% in January. It is unusual for yields to come up even though the Fed is currently cutting rates, but with the uncertainty about the economy under Trump, speculation about future hikes have driven the yield up.
Now, why is the interest rate and all these fed meetings important for us? The concept of raising rates to fight inflation has been established for decades. The Fed’s control of the short term interest rate can stop or stimulate growth in the economy. When the cost of borrowing is low, more people take out loans and spend more, effectively stimulating economic growth. When consumer prices are too high, raising rates can slow spending and therefore slow the rising of prices.
President Trump has argued that the Fed is not doing enough to fuel growth. He has consistently criticized the Fed for not taking a more aggressive means to cut rates to support economic growth and has again called Jerome Powell out for his inaction. Trump has also slammed the Fed for contributing to inflation.
Powell, who is a Republican and former private equity executive, was appointed by Trump as chairman of the Federal Reserve Board in 2018. Though, tensions quickly arose over interest rate policies. Despite this history, President Joe Biden reappointed Powell in 2022 for a second term. Powell has maintained that the Fed’s decisions should be based on impartial economic data analysis, cautioning adjustments of rates to avoid risks such as exacerbating inflation. Powell’s approach is contradictory to Trump’s aggressive stance on rate reductions.
Trump has suggested firing Powell. However, Federal Reserve Chairs serve fixed terms, and unless there is a legal cause, the president cannot simply remove them. Powell intends to serve his full term, lasting until May 2026.
In the coming years, the U.S economy will be shaped by Trump’s policies, which will drive growth through tax cuts, energy expansion, and deregulation. However concerns persist around inflationary risks of his blanket tariffs and the uncertainties of interest rates. Whether or not Trump’s vision of a “Golden Age” comes into fruition remains to be seen.