Trump paves the way for higher interest rates after just one day in office

Among the enemies targeted by US President Donald Trump in his inaugural speech was a foe familiar to anyone who has ever been shopping.

“I will direct all members of my cabinet to marshal the vast powers at their disposal to defeat what was record inflation and rapidly bring down costs and prices,” the president said.

The White House issued a statement that “all agencies will take emergency measures to reduce the cost of living”.

It was perhaps a response to mounting warnings that the bulk of the president’s flagship policies of tariffs and tax cuts are widely expected to push up inflation and pose a hammer blow to hopes of interest rate cuts.

As far as many analysts are concerned, Trump’s plans are more likely to put a rocket under price rises than bring them under control.

The new US president released a bombardment of executive orders within hours of entering the White House on Monday. Policy on tax, energy, climate, regulation, immigration and trade will change rapidly, with significant repercussions not just for the US but the world.

The president’s campaign promises to introduce blanket tariffs on goods will drive up the cost of imports, while an immigration crackdown will constrain the labour supply, just as tax cuts and deregulation provide major stimulus.

James Egelhof, chief US economist at BNP Paribas, said in a note sent to clients ahead of Trump’s inauguration that the Federal Reserve would likely not cut interest rates at all this year in response to Trump. In fact, increases were “possible”.

Iain Stealey, of JP Morgan Asset Management, similarly said: “The primary risk lies in the potential for additional fiscal stimulus, such as expanded tax cuts, which could trigger a resurgence in inflation.”

Here’s what the new president has announced so far and what it means for the economy.

Tariffs

Trump campaigned heavily on a promise to introduce tariffs of up to 60pc on goods from China, plus blanket tariffs of 10pc to 20pc on goods from all countries.

In late November last year, however, he announced surprise plans to use his first day in office to introduce an extra levy of only 10pc on goods from China, but also to introduce tariffs of 25pc on all goods coming from both Mexico and Canada – America’s largest trading partners.

On Monday, the messaging changed again, several times.

In his inaugural address, Trump said “we will tariff and tax foreign countries to enrich our citizens”, and announced he would establish an External Revenue Service to collect duties.

“It will be massive amounts of money pouring into our Treasury, coming from foreign sources,” Trump said.

But when it came to actual action, Trump dialled down. Instead of using his first day in office to introduce blanket tariffs or major charges on any one nation, he said that his trade officials would “undertake a review of, and identify, any unfair trade practices by other countries”. This will focus particularly on China, Mexico and Canada.

The dollar fell as markets dialled back bets on an all-out trade war. But then Trump said in an Oval Office signing ceremony that he would impose 25pc tariffs on Mexico and Canada on Feb 1.

The chopping and changing is likely indicative of the fact that Trump is using the threat of tariffs as a negotiating tactic. The threat of tariffs may be more powerful than actually introducing them.

Economists are therefore hopeful that Trump will not go as far as he has suggested on the campaign trail.

In a note on Monday, Citi said it was expecting on average a five percentage point increase on effective US tariffs on imported goods, including a 10 to 15 percentage point increase in tariffs on China. This would raise average US tariffs from around 2-3pc to 7-8pc.

Citi expects retaliatory tariffs to be roughly half of what the US imposes.

Even so, any tariffs at all will mean higher prices for consumers in the US, greater pressure on US incomes and a blow to exporters. If Trump does impose a 10pc blanket tariff on all imports, it would knock 1.5pc off real US GDP, Citi has calculated.

Goldman Sachs has warned the European Union is likely to be in the firing line too.

Jari Stehn, the investment bank’s chief European economist, says Mr Trump is likely to keep ramping up the pressure on the eurozone to squeeze trade concessions from the bloc.

He predicts the new president will ultimately impose targeted sanctions on imports of cars made in Europe, stopping short of taxing everything arriving from the EU – but that this will still be sufficiently damaging to slow the already-struggling eurozone economy.

“There is going to be continued uncertainty where exactly trade policy will settle and there is an incentive for the US administration to keep Europe under pressure to extract concessions and a compromise,” said Mr Stehn.

“This trade policy uncertainty can have very detrimental cyclical effects on growth, on confidence, on investment and on the industrial cycle.”

It threatens a further slowdown for the eurozone economy which is already hamstrung by high energy prices and competition from China.

Energy

Trump was elected on a promise to “drill baby drill” and repeated that slogan on Monday.

He said: “America will be a manufacturing nation once again, and we have something that no other manufacturing nation will ever have: the largest amount of oil and gas of any country on Earth. And we are going to use it.

“We will bring prices down, fill our strategic reserves up again, right to the top, and export American energy all over the world.”

Trump immediately ordered a series of steps designed to cut red tape and regulation and increase investment in US energy production.

He revoked Biden administration measures blocking the sale of drilling rights in waters along the East and West coasts of America, and signed an executive order to unleash resource production in Alaska.

“We expect US crude oil production to continue rising,” says Paul Ashworth, North America economist at Capital Economics.

Boosting domestic energy production is at the heart of Trump’s pledge to bring down prices. In theory, more oil and gas would help to tackle inflation.

But Trump’s energy policies are in opposition with his trade policies when it comes to inflation. The US imports around 4m barrels of crude oil from Canada every day. Analysts have warned that if the US imposes blanket tariffs on Canadian imports, it will push up fuel prices.

It is also not clear how successful Trump’s efforts to use executive orders will actually be. During his first term, Trump tried unsuccessfully to use emergency powers to keep unprofitable coal plants going.

Boosting oil production is just one half of Trump’s energy plans. The other is undoing Biden’s climate change policies.

The White House said on Monday that Trump would withdraw the US from the 2015 Paris Climate Agreement, under which 196 countries committed to reducing carbon emissions.

This means the US, the world’s second-largest emitter of greenhouse gases will be alongside Yemen, Libya and Iran as the only countries not in the pact.

He has also vowed to “revoke the electric vehicle mandate, saving our auto industry and keeping my sacred pledge to our great American autoworkers”.

Biden set a target for half of all new vehicle sales in the US to be electric by 2030 and offered subsidies of up to $7,500 for drivers who bought electric vehicles (EVs).

Trump painted his decision to axe these subsidies as about freedom of choice and support for the automotive industry, which has complained that EV sales targets around the world are too stretching.

He said in his inauguration address: “In other words, you’ll be able to buy the car of your choice. We will build automobiles in America again at a rate that nobody could have dreamt possible just a few years ago.”

Immigration

Trump said in his inauguration speech he would “declare a national emergency at our southern border”.

“All illegal entry will immediately be halted. And we will begin the process of returning millions and millions of criminal aliens back to the places from which they came.”

He signed an executive order to send troops to the border with Mexico and another ending so-called birth-right citizenship for children who are born in the US to parents who do not have legal immigration status.

More is likely to come. Trump campaigned on a promise to carry out the largest mass deportations in American history.

The Wall Street Journal reported last week that the Trump administration was planning to send up to 200 US Immigration and Customs Enforcement officers to make a large-scale immigration raid in Chicago that was expected to begin on Tuesday morning.

Other so-called sanctuary cities such as New York, Denver and Miami are likely to come in the firing line.

Depending on its eventual scale, the immigration crackdown could have economic consequences.

Ashworth says deportations could reach 500,000 per year, matching the highs seen during the Obama administration. “As a result, our working assumption is that labour force growth will slow to zero,” he says.

A smaller pool of workers would tighten the labour market and would also contribute to higher inflation.

Tax

Back in 2017, Trump announced the biggest overhaul of the US tax system since 1986, substantially reducing rates of income tax and reducing the corporate tax rate from 35pc to 21pc.

The corporation tax cut was permanent, but many of the changes, including the changes to marginal personal income tax rates, were temporary and are due to expire in 2025.

Trump is expected to make the temporary cuts permanent, or at least extend them. Citi calculated this will cost $4 trillion over the next decade, pushing up the US government deficit.

However, because these tax cuts are in place, maintaining them will not create new inflationary pressures.

What will be more significant is whether Trump cuts corporation taxes and scraps taxes on tips – and whether or not he uses higher revenues from tariffs or savings from his efficiency drive to fund them.

Funding for any tax cuts will be key. Citi has calculated that an unfunded tax cut equivalent to 1pc of US GDP could potentially increase US GDP by 1pc in the first year, however this would be a “shock” that would mean higher inflation, higher government debt and higher interest rates.

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