This week begins with the inauguration of the 47th president of the United States, marking the start of a new administration with significant economic and policy implications.
During his third campaign for the presidency, the new president outlined his first-day priorities, including:
Mass deportations and border closures – including a proposed end to birthright citizenship for children of undocumented immigrants.Energy expansion – a pledge to “drill, drill, drill” while rolling back climate regulations.Sweeping tariffs – targeting trade with Canada and Mexico.
While the precise impact of these policies remains uncertain, history suggests that a shrinking working-age population is associated with slower economic growth. Given that much of today’s inflation pressure stems from food, energy, and housing, a move to deport construction workers and agricultural laborers could prove counterproductive. On the other hand, rolling back building regulations and unfunded energy mandates could boost productivity and help ease inflation.
A ‘Liz Truss Moment’ for the U.S.?
Could the new administration face a market-driven crisis, akin to the UK’s 2022 fiscal turmoil under Liz Truss?
Toward the end of 2024, a selloff in U.S. Treasuries – driven partly by uncertainty surrounding the administration’s policy direction – pushed yields higher. Last week, a moderate inflation report helped stabilize yields. While core inflation came in slightly below expectations, headline inflation showed another small uptick.
Higher Inflation, Higher Rates, Higher Risks
Beyond concerns over the sustainability of U.S. government debt, any policies that exacerbate labor shortages and drive inflation higher could force interest rates up even further.
Why does this matter?
The U.S. 10-year Treasury yield is the benchmark for long-term borrowing rates, impacting everything from credit cards to mortgages.Higher interest rates make it harder for households and businesses to borrow, invest and expand.While the economy remains resilient, the labor market is already showing signs of weakness – with very little worker mobility.If rates continue to rise, businesses could tighten hiring further and layoffs could increase.
As the new administration takes the reins, policy clarity will be key. Markets, businesses, and households will be watching closely for signals on trade, immigration, energy and fiscal policy – all of which could shape economic momentum and central bank decisions in the months ahead.
