Trump’s inheriting a solid economy, making it harder to lower borrowing costs or inflation
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President Donald Trump has pledged cheaper prices and lower interest rates, but an economy transformed by the pandemic will make those promises difficult to keep. Economic growth is solid, driven by healthy consumer spending. And budget deficits are huge and could get even larger. Meanwhile, businesses are borrowing more to step up their investments in data centers and artificial intelligence, leading to a greater demand for loans that can raise interest rates.
And if Trump follows through on his promises to impose widespread tariffs on imports and deport millions of immigrants, economists expect inflation could worsen -- making it less likely the Federal Reserve will cut its key interest rate much this year.
All of these trends will likely keep borrowing costs higher, including for homes and cars. Yet on Thursday during the World Economic Forum’s annual event in Davos, Switzerland, Trump said, “I’ll demand that interest rates drop immediately, and likewise, they should be dropping all over the world," though he did not provide further details.
The biggest reason for the likely persistence of higher borrowing costs is the surprising resilience of the economy following the upheavals of the pandemic, trillions of dollars of government financial support from Trump and former President Joe Biden, an inflation spike, and several rounds of recession fears.
Jan Hatzius, chief economist at Goldman Sachs, says the economy is “in the sweet spot of healthy growth.". It has expanded at an annual rate of at least 3% for four out of the last five quarters, the longest such streak in a decade. Unemployment is at a historically low 4.1%. And inflation, which soared to a four-decade high in 2022 and soured most Americans on the economy, is back down to 2.4%, according to the Fed’s preferred measure.
