The betting odds have been suggesting for some time now that Trump would win the US presidential election, and most likely also gain a Republican majority in both House of Representatives and the Senate. But, as they say, a week is a long time in politics, and we are still more than 12 weeks away from voting day. Kamala Harris seems to be enjoying a bit of positive momentum – we’ll have to wait and see if she can keep it up.
Whatever the eventual outcome, it is worthwhile trying to think through some of the potential implications of a Trump victory. In particular, does Trump 2.0 mean that his tariff agenda and expanded deficits are likely to raise price pressures and cause even more restrictive monetary policy than now?
Most economists see Trump’s tariff agenda, coupled with aims to deport millions of undocumented workers and the likelihood of expanded deficits, plus extension of the tax cuts on households and a lowering of the corporate tax rate, all combining to reignite price pressures that are now easing and potentially driving the Federal Reserve to react with more restrictive monetary policy than is presently anticipated.
An Oxford Economics model that looks at the likely policy stances of the candidates predicts that under a second Trump administration an inflation measure excluding food and energy prices would peak 0.3-0.6% above what would be expected under current law and policy. That compares with potential excess inflation of 0.1-0.2% under a Democratic administration led by vice-president Kamala Harris, the presumptive nominee. Most see Harris largely continuing Biden’s economic policies.
Resurgent inflation would be a setback for the Fed, which after aggressive rate rises is on the verge of crushing generation-high inflation, and markets expect a September rate cut, with more to follow.
How the Fed would factor in implications of a Trump victory is unclear, but at least one former US central banker believes the Fed needs to start taking it into account – even in any consideration of a near-term rate cut. “If a Trump victory looks likely, the Fed will need to consider whether cutting based on current data makes sense if likely fiscal actions would cause them to need to reverse policy to counter the inflationary shocks if his publicly announced policies go through,” former Boston Fed leader Eric Rosengren wrote earlier this month. “ That is not politics, it is reacting to a changed forecast.”
Just how a victorious Trump would respond to a Fed that curtails or even reverses any rate cuts is another wild card. Trump during his term famously clashed with Powell, whom he appointed as Fed chief, but he recently told Bloomberg he would not try to oust Powell before his term as chair expires in 2026.
Making predictions about how Trump would behave if he won a second mandate is an almost impossible task, and probably best to cross that bridge when, and if, we come to it.

Source: Real Clear Politics