US President-elect Donald Trump campaigned on promises of aggressive import tariffs, strict immigration curbs, deregulation and smaller government, but the economy he inherits next week may be screaming for something different.

With output expanding above trend, the labor market near maximum employment and adding jobs, and the embers of inflation still smoldering, Trump may be launching his promised reforms into an economy less in need of the sort of stimulus his 2017 tax cuts provided. As a stock selloff following last week’s strong December jobs report showed, it may also be prone to correction given high asset values and a bond market that has been moving yields higher.

“Success for the Trump administration would be to do no harm to the exceptionally performing economy it is inheriting,” said Mark Zandi, chief economist at Moody’s Analytics. On their face, the planned combination of tariffs, deportations, and deficit-funded tax cuts “will do harm. How much ... depends on how aggressively these policies are pursued.”

Trump will take office next week under far different economic circumstances than when he started his first four-year term in 2017.

“The constraints are different, starting with inflation,” which is not yet fully controlled from a pandemic-era spike and has shown little year-over-year improvement in recent months, said Karen Dynan, a Harvard University economics professor and former Obama administration official.

Trump also faces larger federal deficits and higher government borrowing costs than before, and a labor force that has grown faster than expected because of immigration, something Trump wants to curtail.

The Wealth Alliance President and Managing Director Eric Diton says that could mean no interest rate cuts at all in 2025.

Referring to recent US performance that has outstripped that of other developed nations and surprised many economists, Dynan said that “if you believe the economic growth in excess of trend is from immigration, it is going to be hard to get numbers as large as we saw in the latter part of the Biden administration.”

New Landscape

When Trump first entered the White House in 2017 the economy had been growing steadily since the end of the 2007-2009 financial crisis, but the pace was often sluggish and employment had not fully recovered.

There was room for the boost Trump's signature Tax Cuts and Job Act provided, and while the import tariffs that followed dealt a blow to the global economy, the US proved largely resilient.

What had been the longest US economic expansion in modern times ended only when the COVID-19 pandemic began in March 2020.

Inflation was a distant concern back then, seemingly anchored below the Federal Reserve’s 2 percent target. Homebuyers could find 30-year fixed-rate mortgages at around 4 percent, and the government was financing its operations with long-term Treasury bond rates at around 3 percent.

Today, inflation is stingily hanging above the Federal Reserve’s target, mortgage rates are nearing 7 percent, and 30-year Treasury yields are around 5 percent and rising, a fact that may reflect market doubts about whether inflation is contained and about US financial discipline going forward.

“There is still a concern inflation may not be beaten ... We are going to fix that problem, so don’t worry about it,” Fed Governor Christopher Waller said last week of rising long-term bond yields. But “the other thing getting more and more attention is the concern about fiscal deficits ... If that does not seem to change going forward, at some point the markets are going to demand a premium ... That is starting to be what we are seeing.”

While Trump has created an informal Department of Government Efficiency to find savings, there's no plan to address the major deficit drivers: health and retirement benefits for seniors that both political parties consider sacrosanct.

‘Performing well, very well’

If government borrowing costs and the vigilance of bond markets pose one potential set of constraints for Trump, the state of the economy could pose another.

The major data that Fed staff and officials watch, including figures on employment, inflation, consumer spending and overall growth, may not offer much room for improvement without risks.

The unemployment rate in December was 4.1 percent, for example, near or below many estimates of what’s considered sustainable without generating inflation, and the economy gained an impressive 256,000 jobs. With wages growing, consumer spending remains healthy.

Inflation is drifting lower but is still more than half a percentage point above target, with concerns that it could be reignited by any aggressive move to boost output that may already be exceeding potential or by added costs from things like tariffs.

“The US economy is just performing very, very well,” Fed Chair Jerome Powell said in a December 18 press conference at the end of the central bank’s last policy meeting. “We have to stay on task, though,” with monetary policy remaining tight enough to return inflation to 2 percent while keeping the job market intact.

Between Trump’s plans and the economy’s strength, there’s growing doubt about whether the Fed will be able to cut rates much further, if at all.

The uncertainty about what’s ahead is rooted in the gap between Trump’s expansive rhetoric about what he seems to think the economy needs and the actual economic performance over the last year in particular.

The Fed’s meeting last month saw staff beginning to suggest slower growth and higher unemployment may be the immediate result of expected trade and other policies. Policymakers publicly have highlighted the uncertainty they are dealing with while also attempting some balance.

Noting that businesses themselves have been optimistic about upcoming conditions, despite possible disruptions from tariffs and deportations, “I expect more upside than downside in terms of growth,” Richmond Fed President Tom Barkin said last week even as he also acknowledged possible inflation risks.

And, Barkin said of the incoming administration’s likely policy initiatives, “you could walk some of them back if they prove to be damaging.”