With President-elect Donald Trump’s recent victory in the 2024 Election, his upcoming administration is poised to bring notable changes to U.S. economic policy, impacting interest rates, market stability, and consumer confidence.
We spoke with Beata Caranci, Chief Economist for TD Bank, about the implications of President-elect Trump’s return to the White House, the Federal Reserve’s approach, borrowing costs, inflation and so much more.
Interest rates and market stability
Following the Federal Open Market Committee’s (FOMC) recent meeting in November, Beata said a few things were notable.
She said that it's clear the FOMC is committed to ongoing reductions on interest rates.
“There were no hints in terms of speed and magnitude,” Beata said. "On the same token, markets have reduced their expectations on the amount of rate cuts for next year."
Over the past two months, the Fed has delivered 100 basis points in cuts, with the current policy rate now standing at 4.75%. Beata expects the Fed will have a go-slow approach through 2025.
"Market participants think rates will end 2025 around 3.75% instead of 2.75%," she added. "That isn't all a Trump story, that's a U.S. strength story as well."
“There’s nothing Jerome Powell (Chair of the Federal Reserve of the United States) said to push markets away from this view,” Beata notes, emphasizing the Fed’s cautious stance amid heightened political changes.
The steady hand of the Fed is reassurance to investors, particularly as markets prepare to interpret significant policy shifts by the incoming Trump administration. Despite his win, President-elect Trump’s influence on the Federal Reserve will take time, with Powell stating a clear commitment to remain in the Chair seat until the end of the term in early 2026.
The impact on borrowing – short and long-term
Beata explained that interest rates affect different types of borrowing in distinct ways. She broke it down into two areas – fixed rate and the prime rate.
Fixed-rate loans, such as 10- or 30-year mortgages, are shaped by changes in long-term yields. However, variable-rate loans tied to the prime rate are more directly and immediately affected by those decisions made by the central bank when they adjust the policy rate.
The 10-year Treasury yield rose by approximately 60 basis points from a recent low. This can encapsulate many cross currents, including market concerns about inflation, long term risks on government debt or the possibility that the Federal Reserve may place the stopping point on the policy rate at a higher level than previously thought. Regardless of the reason, the upward shift in yields can affect those taking out a longer-term business loans, mortgages, and more.
“For people taking out a mortgage today versus a month ago, they faced a higher mortgage rate,” Beata notes.
However, short-term borrowers may benefit from some relief, as floating rates move in the other direction as the Federal Reserve cuts the policy rate. This nuanced effect underscores how President Elect Trump’s economic policies may influence both short- and long-term borrowing as they unfold over the next four years.
Consumer spending: A resilient economic driver
Despite inflation concerns, consumer spending has been central to the U.S. economy’s resilience, particularly in the wake of the pandemic.
“There is an impulse there to keep spending,” Beata observes, pointing to strong consumer spending patterns in the third quarter of 2024. This spending momentum appears to be carrying into the fourth quarter, buoyed by a sense of economic optimism among Americans.
“Sometimes spending isn’t necessarily tied to what’s happening in your bank account, but how you feel,” Beata adds. "Going into 2025, we may see a greater impulse in spending if confidence improves. What we do know is that that Trump administration is inheriting a strong and resilient economy."
The potential for additional tax relief under his leadership could further support consumer spending, though inflation and interest rates may become a balancing act for the new administration.
President-elect Trump’s economic agenda
With a strong mandate, President-elect Trump’s administration is expected to introduce policies focused on border security, tax cuts, and deregulation.
Inflation sits at the center of his agenda as TD Economics has already noted that the federal deficit would grow if President-elect Trump’s full suite of campaign tax promises are implemented.
"When you win with a strong mandate, you have to deliver," she said. "Obviously, border security is a huge part."
Beata said that will motivate the administration to deliver on border protection and take things one step further, via deportations. She said that while this could be costly, deportations may not happen in the first year due to the complexity of logistics, but a focus on border security can be quickly implemented in 2025.
Another key policy change President-elect Trump emphasized on the campaign trail was a plan to enforce tariffs on all countries exporting to the U.S., and a 25% tariff-threat was recently levied against Canada and Mexico.
In the international arena, President-elect Trump’s trade policies will likely focus on ensuring U.S. dominance in areas such as digital technology, defense, and artificial intelligence, with a particular emphasis on staying ahead of China on all fronts.
“China’s at the top of their list,” Beata says, hinting that Trump’s administration will prioritize securing a competitive edge. Mexico also remains in focus, with border security and trade dynamics in the auto sector expected to be central issues.
Balancing fiscal responsibility with economic growth
While President-elect Trump’s policies have the potential to stimulate sectors of the economy, the question of how they will be funded remains.
“We know what the initiatives are; we don’t know what the price tag is,” Beata points out, highlighting potential concerns about increased deficit spending. The bond market, in particular, will be watching closely to gauge whether President-elect Trump’s ambitious plans can be achieved without exacerbating the national debt.
Financial markets are poised for a potentially transformative period, with President-elect Trump’s policies set to shape the trajectory of the U.S. economy in the years to come.
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