Trump inherits a strong economy, making it harder to reduce borrowing costs or inflation

“Households were shrinking their balance sheets relative to their income, and that is a very important disinflationary force that is not present now,” said Julia Coronado, president of MacroPolicy Perspectives and a former Fed economist.

Today, most households have less debt, and higher-income families especially benefit from large increases in the value of their homes and their stock market wealth. Around 40% of housing is now owned freely and without a mortgage. Greater wealth can spur continued spending on travel, electronics and dining.

Additionally, high-tech companies are increasing their investments in data centers to accelerate their work on artificial intelligence. Trump on Tuesday announced a joint venture between OpenAI, Oracle and Japanese bank Softbank to invest $500 billion in data centers and power generation to power AI research. Before the pandemic, many businesses were storing cash and not investing as much, which can keep interest rates low.

“We’re in a different world,” said Joe Brusuelas, chief economist at RSM, a tax consulting and advisory firm. “The era of low inflation and low interest rates is over. In its place is a new framework characterized by scarce capital and higher rates.

As a result, Trump’s promises to stimulate the economy through tax cuts and deregulation, while also promising to impose tariffs and immigration restrictions, could keep prices high.

“It’s going to be inflationary, and it’s going to push (Fed) policymakers to adopt tougher policies than they otherwise would,” said Gregory Daco, chief economist at EY. “So you’re going to find yourself in a higher interest rate environment.”

Trump seeks to foster increased oil and gas production in the United States, in an effort to lower energy prices and curb inflation. This would allow the Fed to reduce its key rate.

But that doesn’t take into account the reaction of financial markets, which also affects the cost of borrowing for a house or car. Since the Fed began cutting its benchmark rate in September, the yield on 10-year Treasury notes – which heavily influences mortgage rates – has actually increased significantly.

Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, says investors expect continued stronger growth, fueled in part by Trump’s proposals to cut taxes and ease regulations. In this scenario, the Fed would be less likely to cut its key rate.

Many investors are ignoring Trump’s tariff threats, hoping he intends to use them as leverage in international negotiations, rather than imposing them permanently.

“I think President Trump was expected to implement all the good policies and leave all the bad growth policies behind,” Goldberg said.

Another trend that Trump helped spark is the rise of protectionist measures around the world, after two decades of globalization. This has led multinational companies to relocate their production from countries that are the target of Trump’s ire, particularly China, to others, such as Vietnam or Malaysia.

“Instead of globalization driving down prices, or at the very least constraining them, we are now offshoring supply chains and protectionist barriers are rising,” Brusuelas said. Almost all economists predict that this will cause prices to rise, although the increase could be modest.

Another change is that stubbornly high annual budget deficits also threaten to drive up interest rates, as Wall Street investors could demand higher returns to buy all the Treasury securities needed to finance the debt.

Last week, the nonpartisan Congressional Budget Office said this year’s deficit would likely reach $1.9 trillion and reach $2.7 trillion within a decade. Trump’s proposals to extend his 2017 tax cuts and implement new ones, such as eliminating taxes on tips, could further widen deficits.

“If we don’t reduce budget deficits, we’re going to see long-term bond yields rise,” Fed Governor Chris Waller said earlier this month. “And that’s what we’re starting to see.”