Uncertainty in Economic and Political Decisions: A Look at the U.S. Economy Under the Second Trump Administration
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The term "uncertainty" has become increasingly prevalent in discussions surrounding political decisions, financial markets, and economic trends. In this article, we examine the key economic indicators that the Federal Reserve and the controversial second Trump administration are focusing on.
The U.S. Economy Post-COVID: Inflation and the Federal Reserve’s Response
The U.S. Economy Post-COVID: Inflation and the Federal Reserve’s Response
The U.S. and global economies suffered significant setbacks due to inflation following the COVID-19 crisis. However, the Federal Reserve performed well in 2024, managing to control inflation. The key question remains: is this the calm before the storm?
Over the past three years, inflation has fluctuated significantly, peaking at 9% in June 2022 and declining to approximately 3% by February 2025. At the beginning of 2024, the Federal Reserve explicitly stated that a reduction in interest rates would only be considered if inflation stabilized at 2.5%. Although this threshold was reached, the Fed's ideal scenario was to maintain inflation at this level sustainably. However, towards the end of 2024, inflation showed signs of rising again, prompting the Fed to announce that if inflation did not decline by December, it would halt rate cuts. This stance is in direct conflict with Trump's expansionary economic policies, indicating a potential divergence between the Federal Reserve under Jerome Powell and the Trump administration.
The Housing Market and Its Impact on Inflation
The Housing Market and Its Impact on Inflation
A key determinant of U.S. inflation is consumer spending, particularly on housing and food. Analysis of the U.S. real estate market suggests that every 1% increase in property prices contributes approximately 0.65% to overall inflation. Housing inflation is especially critical since it constitutes 30-40% of household expenditures. Thus, the Federal Reserve must focus on reducing housing costs, which include rent, mortgage interest rates, and property prices
Although rental inflation was successfully controlled in 2024, mortgage rates remain alarmingly high, hovering around 6%, making home purchases increasingly difficult for consumers. Demand in the housing sector continues to exceed supply, and a 6% mortgage rate is the highest it has been in two decades. The Federal Reserve aims to curb demand to lower 30-year mortgage rates, but this could lead to further tensions with the Trump administration.
Reducing housing prices appears to be an uphill battle. Given the inflationary outlook and high mortgage interest rates, the risk of housing prices rising outweighs the likelihood of a decline. This means added financial pressure on consumers, who are already struggling with affordability.
Investment Risks and Market Volatility
Investment Risks and Market Volatility
The current market conditions suggest a higher risk of inflation in the near future. However, for investors, the present climate is fraught with uncertainty, making investments riskier. With the Federal Reserve maintaining its restrictive monetary policies, high mortgage rates are likely to persist.
Despite these challenges, the U.S. economy has shown resilience in 2024, even as other economies grappled with recessions and stagflation. Industrial indicators, such as the Purchasing Managers' Index (PMI), have remained above 50, signaling stable economic activity.
The Job Market: A Crucial Indicator for the Federal Reserve
The Job Market: A Crucial Indicator for the Federal Reserve
For the past 18 months, the Federal Reserve has consistently emphasized the importance of employment data in shaping its policy decisions. A strong labor market provides the Fed with the flexibility to adopt a restrictive stance on interest rates. The U.S. unemployment rate currently stands at approximately 4.3%, which is slightly better than the Fed's target. It would take an increase to 4.5-5% for the Fed to reconsider its approach.
With 160 million employed individuals and a GDP of $30 trillion, the U.S. economy remains robust. However, Trump's policies pose another risk. In 2024, the U.S. economy added an average of 170,000 jobs per month. Under Trump’s administration, this number could decline by 25,000 to 100,000 jobs in 2025. A decrease in labor supply could trigger wage inflation, complicating the Federal Reserve's efforts to maintain price stability.
Interest Rate Outlook: The Fed’s Dilemma
Interest Rate Outlook: The Fed’s Dilemma
Based on Federal Reserve data and policy meetings, it is clear that the Fed prioritizes inflation expectations over economic downside risks. Given the strong economy and labor market, the Fed is expected to maintain a restrictive monetary policy in 2025.
Currently, the interest rate stands at 4.5%. In an optimistic scenario, the Fed could implement two rate cuts of 0.5% each, bringing the rate down to 3.5% by the end of 2025. However, given inflationary pressures, a more conservative outlook suggests two smaller rate cuts of 0.25% each, resulting in a year-end rate of around 4%.
In the long term, even after inflation is controlled, the neutral interest rate is expected to be higher than pre-pandemic levels. Before COVID-19, this rate was slightly below 3%, but going forward, it is projected to remain between 3-4%, with a likely target above 3.5%.
The Strength of the U.S. Dollar
The Strength of the U.S. Dollar
The U.S. dollar remains one of the most actively traded assets globally, second only to stocks like Alphabet and Amazon. Projections indicate that in 2025, the dollar will continue to be the strongest currency, just as it was in 2024. Currently valued at approximately 106, the dollar could rise to 116 by mid-2025. However, Trump’s policies aim to weaken the dollar, introducing another layer of uncertainty into the economic outlook.
Trade Tariffs and Inflation
Trade Tariffs and Inflation
The impact of Trump's trade tariffs on inflation appears limited for now, as imports constitute only about 10% of U.S. consumer expenditures. Additionally, the appreciation of the dollar in late 2024 has offset some of the tariff-induced price increases. However, retaliatory actions by other countries could create new economic challenges.
Uncertainty Dominates the Outlook
Uncertainty Dominates the Outlook
It is still too early to assess the full impact of Trump’s policies. However, if he intends to implement significant changes, the first two years of his term will be critical, especially since he has congressional support until the 2026 midterm elections. As global economic dynamics shift, uncertainty remains the defining characteristic of the current economic and political landscape.
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