With Election Day behind us, the political landscape has crystallized, presenting a notable shift in the governance of the United States. Donald Trump has been re-elected as President, marking a significant return to leadership for the former president. In addition to the presidential victory, Republicans have gained seats in the Senate, while control of the House of Representatives leans towards the GOP, setting the stage for a potentially transformative legislative period. This analysis from Wells Fargo explores the implications of these election outcomes for the U.S. economy and various policy areas that will shape economic growth in the years to come.
Overview of Economic Policies Ahead
The implications of these election results for the U.S. economy are profound, particularly in tax and trade policy. As Wells Fargo’s economic team outlines, several key areas are likely to shape the economic landscape in the coming years.
Tax Policy and Its Effects
A continuation of the 2017 Tax Cuts and Jobs Act (TCJA) appears to be on the horizon. Republicans advocate for extending these provisions to expire in 2025, but the consensus is that an extension will not significantly alter the current economic forecasts. Maintaining the TCJA prevents tax rates from reverting to pre-2017 levels without introducing new fiscal impulses.
However, discussions around additional tax cuts could influence economic growth and inflation rates. Should new tax cuts be enacted that mirror the original TCJA’s $1.5 trillion impact over ten years, real GDP growth projections for 2026 and 2027 may see slight upward revisions. Nevertheless, the fiscal environment is markedly different now than in 2016, with rising interest rates and an already substantial structural budget deficit complicating matters.
Some analysts express concern that the proposed tax cuts could exacerbate the federal budget deficit, which the Congressional Budget Office (CBO) anticipates will exceed $22 trillion over the next decade. This situation raises questions about the sustainability of tax cuts without corresponding spending reductions or revenue increases.
Trade Policy: Tariffs and Economic Growth
Trump’s proposed trade policies, including a 10 percent tariff on all trading partners and a significant 60 percent tariff on China, are poised to introduce a stagflationary environment in 2025. Should these tariffs be implemented swiftly after the inauguration, this forecast estimates an increase in the core Consumer Price Index (CPI) inflation rate from 2.7 percent to 4 percent. While this would also dampen real GDP growth—projected at a sluggish 0.6 percent—the potential for retaliatory tariffs from trading partners could further exacerbate these challenges.
The economic impact of tariffs extends beyond inflation; they can also disrupt supply chains and increase consumer costs. For businesses reliant on imports, higher tariffs may necessitate price adjustments, ultimately affecting consumer purchasing power and overall demand in the economy. Furthermore, a rise in tariffs can provoke trade wars, leading to a decline in exports and further economic strain.
Federal Reserve’s Monetary Policy Outlook
The Federal Open Market Committee (FOMC) is anticipated to adjust its monetary policy in response to these economic changes. The current forecast suggests a reduction in the federal funds rate to a target range of 3 percent to 3.25 percent by the end of next year. However, the prospect of increased inflation from new tax cuts and tariffs may skew this outlook, potentially leading to less aggressive easing than currently projected. The FOMC’s response to inflation is driven by fiscal policy, especially from tax cuts, and is expected to be more hawkish, presenting a complex scenario for future monetary policy.
Additionally, the Federal Reserve’s leadership could change under Trump’s administration, influencing the central bank’s approach to managing inflation and interest rates. If Trump appoints new members sympathetic to his economic views, this could lead to reevaluating the Fed’s current policies and its role in addressing inflationary pressures.
Immigration Policy and Labor Market Growth
On the immigration front, Trump’s promises to tighten border security and deport undocumented immigrants could further strain the labor market. Since a significant portion of the U.S. labor force is made up of foreign-born workers, restrictive immigration policies may hinder long-term economic growth by slowing labor force expansion. Although immediate impacts may be marginal, the broader economic repercussions of such policies could present significant challenges, especially if legislative changes occur.
The Pew Research Center estimates that about 11 million undocumented immigrants reside in the U.S., contributing to various sectors, including agriculture, construction, and services. Policies aimed at deportation or stringent immigration restrictions could lead to labor shortages, increasing labor costs for employers and slowing economic growth.
Moreover, the labor force growth rate is a critical determinant of a country’s long-term economic potential. If immigration restrictions lead to a slower labor force growth rate, as projected, potential economic output may decline, affecting everything from consumer spending to overall productivity.
Conclusion: A Future Filled with Uncertainty
As Republicans regain control of Congress and the White House, the potential for significant policy shifts looms. While the extension of the TCJA seems likely, the specifics surrounding new tax cuts and trade tariffs remain uncertain. These factors will likely influence inflation, economic growth, and the Federal Reserve’s monetary policy in the years ahead.
Wells Fargo’s economic team plans to release a comprehensive analysis of the post-election forecast on November 21, along with a webinar discussing the annual economic outlook.
