Donald Trump is returning to the White House, and the U.S. economy is in for a wild ride.
The former and soon-to-be next president has promised an escalation of tariffs on all U.S. imports and the biggest mass deportation of migrants in history. He also wants a say in Federal Reserve policy. Many economists reckon the platform adds up to higher inflation and slower growth ahead.
Trump also promised sweeping tax cuts during the campaign that culminated in his victory over Vice President Kamala Harris. His ability to deliver them may hinge on the outcome of a House contest that remains in doubt, even as Republicans won control of the Senate. A divided government would require the new president to bargain more intensively with Congress over fiscal policy.
Donald Trump during an election night event in West Palm Beach, Florida
Win McNamee/Photographer: Win McNamee/Getty
Still, it’s Trump’s tariffs — which he’s threatened to slap on adversaries and allies alike — that stand to have the biggest impact on the U.S. economy, analysts say. The self-proclaimed “tariff man” enacted duties on about $380 billion in imports in his first term. Now he’s promising much wider measures, including a 10% to 20% charge on all imported goods and 60% on Chinese products.
Trump says the import taxes can help raise revenue, as well as reduce U.S. trade deficits and re-shore manufacturing. What’s more, as Trump demonstrated last time he was in office, a president can enact tariffs essentially single-handedly.
“He’s going to be off and running,” said Mark Zandi, chief economist at Moody’s Analytics. “I think we’re going to get these policies in place very quickly and they’re going to have impact immediately.”
Most economists say inflation will rise as a result, because consumers will pay higher costs that are passed on by importers who pay the tariffs.
Moody’s predicted before the vote that with Trump as president inflation would rise to at least 3% next year — and even higher in the event of a GOP sweep — from 2.4% in September, fueled by higher tariffs and an outflow of migrant labor. If targeted countries retaliate and a trade war ensues, the US will face “a modest stagflationary shock,” Wells Fargo economist Jay Bryson said in an Oct. 16 webinar, a situation in which economic output stalls and price pressures rise.
‘Winners and losers’
Such a scenario will put the Federal Reserve in the position of wanting to raise interest rates to combat inflation, but also to cut rates to prevent the risk of a recession, said Jason Furman, the former head of the White House Council of Economic Advisers under President Barack Obama.
“In economics, everything has winners and losers,” Furman said in an Oct. 17 webinar. “In this case, the losers are consumers and most businesses.”
Trump will likely have thoughts on how the central bank should respond. He told Bloomberg News he should have a “say” on interest rates, “because I think I have very good instincts.” Pressure on the Fed during a second Trump term would worry investors, because history suggests countries that allow politicians to direct monetary policy are likely to face higher inflation.
In general, Trump and his supporters dismiss the downbeat projections from “Wall Street elites.” They point out that inflation didn’t spike in his first term while he enacted tariffs and tax cuts — and presided over robust economic growth, until the pandemic hit.
The Coalition for a Prosperous America, which supports trade protectionism, estimated that a 10% “universal” tariff, combined with income-tax cuts that Trump is promising, would add more than $700 billion to economic output and create 2.8 million additional jobs.
‘Loosening up’
Michael Faulkender, chief economist at the America First Policy Institute that’s staffed with officials from Trump’s first administration, said the negative projections don’t account for the economic growth that Trump’s deregulatory agenda and plans to boost energy production would generate.
“There’s a lot of loosening up of our economy, removing structural costs in our economy, that can generate growth in an actually deflationary way,” Faulkender said.
Trump promised to make permanent the tax cuts he pushed through in 2017 for households, small businesses and the estates of wealthy individuals — most of which are due to expire at the end of 2025. Even if the GOP loses its sway over the House, there’s likely some room to strike a deal with Democrats, who also favor keeping some of those measures in place.
Any such bargaining will take place under the pressure of another looming debt-ceiling showdown, with borrowing limits set to kick in again next year under a deal to resolve a 2023 standoff. Congress-watchers see other areas for potential agreement, because some — like a tax-credit for childcare and an exemption for tips — were backed by both parties during the campaign. But some of Trump’s proposals, including further cuts in the corporate tax rate, would likely be off the table if Republicans lose the House.
The tax and spending promises that the Trump campaign rolled out during the election could collectively cost more than $10 trillion over a decade, according to Bloomberg News calculations. Trump said he’d use tariff revenues to help pay for them, but economists at the Peterson Institute estimate that the import duties could only raise a fraction of that sum.
Many economists also doubt that Trump’s trade policy can quickly boost manufacturing employment, one of the stated goals. It takes years to build factories, and automation means they nowadays require fewer workers.
A National Bureau of Economic Research study concluded that Trump’s past tariffs failed to increase jobs in protected industries, while hurting jobs in other sectors that got caught up in the trade war.
“The tariffs are not going to bring down the trade deficit, they’re not going to restore manufacturing jobs, but it’ll take several years to discover that and a lot of pain in between,” Maurice Obstfeld, formerly a chief economist at the International Monetary Fund, said in an Oct. 17 webinar.
‘Significant chaos’
Trump’s threat to deport millions of undocumented migrants is another source of alarm to many economists and businesses. It would reduce the labor pool available to companies that have found it hard to hire.
Deporting post-2020 arrivals would shrink the economy by some 3% by the next election in 2028, while the drop in demand from a smaller population would lower prices, Bloomberg Economics’ Chris Collins wrote in a note. The impact would likely land hardest in industries like construction, leisure and hospitality — and states including Texas, Florida and California — where migrants make up the biggest share of the labor force.
Of course, campaign pledges often fall by the wayside, and the economic impact of Trump’s second-term policies will depend on which ones he prioritizes and can get done.
Many doubt that deportations of migrants are feasible on the scale Trump has proposed. He’s floated using the U.S. Immigration and Customs Enforcement or even the Alien Enemies Act of 1798 — used to justify World War II-era internment of noncitizens — to carry out the plan, which would likely face court challenges.
As for tariffs, Trump himself has indicated the numbers he floats are often intended as bargaining levers. But even the threat of tariffs will be disruptive as companies scramble to renegotiate contracts and reconfigure supply chains to get ahead of the potential duties, said Wendy Edelberg, director of the Brookings Institution’s Hamilton Project.
“We’re going to see this significant chaos across the entire business landscape,” she said.
Senate Republicans unveiled a budget blueprint designed to fast-track a renewal of President Donald Trump’s tax cuts and an increase to the nation’s borrowing limit, ahead of a planned vote on the resolution later this week.
The Senate plan will allow for a $4 trillion extension of Trump’s tax cuts and an additional $1.5 trillion in further levy reductions. The House plan called for $4.5 trillion in total cuts.
Republicans say they are assuming that the cost of extending the expiring 2017 Trump tax cuts will cost zero dollars.
The draft is a sign that divisions within the Senate GOP over the size and scope of spending cuts to offset tax reductions are closer to being resolved.
Lawmakers, however, have yet to face some of the most difficult decisions, including which spending to cut and which tax reductions to prioritize. That will be negotiated in the coming weeks after both chambers approve identical budget resolutions unlocking the process.
The Senate budget plan would also increase the debt ceiling by up to $5 trillion, compared with the $4 trillion hike in the House plan. Senate Republicans say they want to ensure that Congress does not need to vote on the debt ceiling again before the 2026 midterm elections.
“This budget resolution unlocks the process to permanently extend proven, pro-growth tax policy,” Senate Finance Chairman Mike Crapo, an Idaho Republican, said.
The blueprint is the latest in a multi-step legislative process for Republicans to pass a renewal of Trump’s tax cuts through Congress. The bill will renew the president’s 2017 reductions set to expire at the end of this year, which include lower rates for households and deductions for privately held businesses.
Republicans are also hoping to include additional tax measures to the bill, including raising the state and local tax deduction cap and some of Trump’s campaign pledges to eliminate taxes on certain categories of income, including tips and overtime pay.
The plan would allow for the debt ceiling hike to be vote on separately from the rest of the tax and spending package. That gives lawmakers flexibility to move more quickly on the debt ceiling piece if a federal default looms before lawmakers can agree on the tax package.
Political realities
Senate Majority Leader John Thune told reporters on Wednesday, after meeting with Trump at the White House to discuss the tax blueprint, that he’s not sure yet if he has the votes to pass the measure.
Thune in a statement said the budget has been blessed by the top Senate ruleskeeper but Democrats said that it is still vulnerable to being challenged later.
The biggest differences in the Senate budget from the competing House plan are in the directives for spending cuts, a reflection of divisions among lawmakers over reductions to benefit programs, including Medicaid and food stamps.
The Senate plan pares back a House measure that calls for at least $2 trillion in spending reductions over a decade, a massive reduction that would likely mean curbing popular entitlement programs.
The Senate GOP budget grants significantly more flexibility. It instructs key committees that oversee entitlement programs to come up with at least $4 billion in cuts. Republicans say they expect the final tax package to contain much larger curbs on spending.
The Senate budget would also allow $150 billion in new spending for the military and $175 billion for border and immigration enforcement.
If the minimum spending cuts are achieved along with the maximum tax cuts, the plan would add $5.8 trillion in new deficits over 10 years, according to the Committee for a Responsible Federal Budget.
The Senate is planning a vote on the plan in the coming days. Then it goes to the House for a vote as soon as next week. There, it could face opposition from spending hawks like South Carolina’s Ralph Norman, who are signaling they want more aggressive cuts.
House Speaker Mike Johnson can likely afford just two or three defections on the budget vote given his slim majority and unified Democratic opposition.
Financial advisors and clients worried about stock volatility and inflation can climb bond ladders to safety — but they won’t find any, if those steps lead to a place with higher taxes.
The choice of asset location for bond ladders in a client portfolio can prove so important that some wealthy customers holding them in a taxable brokerage account may wind up losing money in an inflationary period due to the payments to Uncle Sam, according to a new academic study. And those taxes, due to what the author described as the “dead loss” from the so-called original issue discount compared to the value, come with an extra sting if advisors and clients thought the bond ladder had prepared for the rise in inflation.
Bond ladders — whether they are based on Treasury inflation-protected securities like the strategy described in the study or another fixed-income security — provide small but steady returns tied to the regular cadence of maturities in the debt-based products. However, advisors and their clients need to consider where any interest payments, coupon income or principal accretion from the bond ladders could wind up as ordinary income, said Cal Spranger, a fixed income and wealth manager with Seattle-based Badgley + Phelps Wealth Managers.
“Thats going to be the No. 1 concern about, where is the optimal place to hold them,” Spranger said in an interview. “One of our primary objectives for a bond portfolio is to smooth out that volatility. … We’re trying to reduce risk with the bond portfolio, not increase risks.”
Risk-averse planners, then, could likely predict the conclusion of the working academic paper, which was posted in late February by Edward McQuarrie, a professor emeritus in the Leavey School of Business at Santa Clara University: Tax-deferred retirement accounts such as a 401(k) or a traditional individual retirement account are usually the best location for a Treasury inflation-protected securities ladder. The appreciation attributes available through an after-tax Roth IRA work better for equities than a bond ladder designed for decumulation, and the potential payments to Uncle Sam in brokerage accounts make them an even worse asset location.
“Few planners will be surprised to learn that locating a TIPS ladder in a taxable account leads to phantom income and excess payment of tax, with a consequent reduction in after-tax real spending power,” McQuarrie writes. “Some may be surprised to learn just how baleful that mistake in account location can be, up to and including negative payouts in the early years for high tax brackets and very high rates of inflation. In the worst cases, more is due in tax than the ladder payout provides. And many will be surprised to learn how rapidly the penalty for choosing the wrong asset location increases at higher rates of inflation — precisely the motivation for setting up a TIPS ladder in the first place. Perhaps the most surprising result of all was the discovery that excess tax payments in the early years are never made up. [Original issue discount] causes a dead loss.”
The Roth account may look like a healthy alternative, since the clients wouldn’t owe any further taxes on distributions from them in retirement. But the bond ladder would defeat the whole purpose of that vehicle, McQuarrie writes.
“Planners should recognize that a Roth account is a peculiarly bad location for a bond ladder, whether real or nominal,” he writes. “Ladders are decumulation tools designed to provide a stream of distributions, which the Roth account does not otherwise require. Locating a bond ladder in the Roth thus forfeits what some consider to be one of the most valuable features of the Roth account. If the bond ladder is the only asset in the Roth, then the Roth itself will have been liquidated as the ladder reaches its end.”
That means that the Treasury inflation-protected securities ladder will add the most value to portfolios in a tax-deferred account (TDA), which McQuarrie acknowledges is not a shocking recommendation to anyone familiar with them. On the other hand, some planners with clients who need to begin required minimum distributions from their traditional IRA may reap further benefits than expected from that location.
“More interesting is the demonstration that the after-tax real income received from a TIPS ladder located in a TDA does not vary with the rate of inflation, in contrast to what happens in a taxable account,” McQuarrie writes. “Also of note was the ability of most TIPS ladders to handle the RMDs due, and, at higher rates of inflation, to shelter other assets from the need to take RMDs.”
The present time of high yields from Treasury inflation-protected securities could represent an ample opportunity to tap into that scenario.
“If TIPS yields are attractive when the ladder is set up, distributions from the ladder will typically satisfy RMDs on the ladder balance throughout the 30 years,” McQuarrie writes. “The higher the inflation experienced, the greater the surplus coverage, allowing other assets in the account to be sheltered in part from RMDs by means of the TIPS ladder payout. However, if TIPS yields are borderline unattractive at ladder set up, and if the ladder proved unnecessary because inflation fell to historically low levels, then there may be a shortfall in RMD coverage in the middle years, requiring either that TIPS bonds be sold prematurely, or that other assets in the TDA be tapped to cover the RMD.”
Other caveats to the strategies revolve around any possible state taxes on withdrawals or any number of client circumstances ruling out a universal recommendation. The main message of McQuarrie’s study serves as a warning against putting the ladder in a taxable brokerage account.
“Unsurprisingly, the higher the client’s tax rate, the worse the outcomes from locating a TIPS ladder in taxable when inflation rages,” he writes. “High-bracket taxpayers who accurately foresee a surge in future inflation, and take steps to defend against it, but who make the mistake of locating their TIPS ladder in taxable, can end up paying more in tax to the government than is received from the TIPS ladder during the first year or two.”
For municipal or other types of tax-exempt bonds, though, a taxable account is “the optimal place,” Spranger said. Convertible Treasury or corporate bonds show more similarity with the Treasury inflation-protected securities in that their ideal location is in a tax-deferred account, he noted.
Regardless, bonds act as a crucial core to a client’s portfolio, tamping down on the risk of volatility and sensitivity to interest rates. And the right ladder strategies yield more reliable future rates of returns for clients than a bond ETF or mutual fund, Spranger said.
“We’re strong proponents of using individual bonds, No. 1 so that we can create bond ladders, but, most importantly, for the certainty that individual bonds provide,” he said.
Loan applicants and mortgage companies often rely on an Internal Revenue Service that’s dramatically downsizing to help facilitate the lending process, but they may be in luck.
That’s because the division responsible for the main form used to allow consumers to authorize the release of income-tax information to lenders is tied to essential IRS operations.
The Income Verification Express Service could be insulated from what NMN affiliate Accounting Today has described of a series of fluctuating IRS cuts because it’s part of the submission processing unit within wage and investment, a division central to the tax bureau’s purpose.
“It’s unlikely that IVES will be impacted due to association within submission processing,” said Curtis Knuth, president and CEO of NCS, a consumer reporting agency. “Processing tax returns and collecting revenue is the core function and purpose of the IRS.”
Knuth is a member of the IVES participant working group, which is comprised of representatives from companies that facilitate processing of 4506-C forms used to request tax transcripts for mortgages. Those involved represent a range of company sizes and business models.
The IRS has planned to slash thousands of jobs and make billions of dollars of cuts that are still in process, some of which have been successfully challenged in court.
While the current cuts might not be a concern for processing the main form of tax transcript requests this time around, there have been past issues with it in other situations like 2019’s lengthy government shutdown.
President Trump recently signed a continuing funding resolution to avert a shutdown. But it will run out later this year, so the issue could re-emerge if there’s an impasse in Congress at that time. Republicans largely dominate Congress but their lead is thinner in the Senate.
The mortgage industry will likely have an additional option it didn’t have in 2019 if another extended deadlock on the budget emerges and impedes processing of the central tax transcript form.
“It absolutely affected closings, because you couldn’t get the transcripts. You couldn’t get anybody on the phone,” said Phil Crescenzo Jr., vice president of National One Mortgage Corp.’s Southeast division.
There is an automated, free way for consumers to release their transcripts that may still operate when there are issues with the 4506-C process, which has a $4 surcharge. However, the alternative to the 4506-C form is less straightforward and objective as it’s done outside of the mortgage process, requiring a separate logon and actions.
Some of the most recent IRS cuts have targeted technology jobs and could have an impact on systems, so it’s also worth noting that another option lenders have sometimes elected to use is to allow loans temporarily move forward when transcript access is interrupted and verified later.
There is a risk to waiting for verification or not getting it directly from the IRS, however, as government-related agencies hold mortgage lenders responsible for the accuracy of borrower income information. That risk could increase if loan performance issues become more prevalent.
Currently, tax transcripts primarily come into play for government-related loans made to contract workers, said Crescenzo.
“That’s the only receipt that you have for a self-employed client’s income to know it’s valid,” he said.
The home affordability crunch and rise of gig work like Uber driving has increased interest in these types of mortgages, he said.
Contract workers can alternatively seek financing from the private non-qualified mortgage market where bank statements could be used to verify self-employment income, but Crescenzo said that has disadvantages related to government-related loans.
“Non QM requires higher downpayments and interest rates than traditional financing,” he said.
In the next couple years, regional demand for loans based on self-employment income could rise given the federal job cuts planned broadly at public agencies, depending on the extent to which court challenges to them go through.
Those potential borrowers will find it difficult to get new mortgages until they can establish more of a track record with their new sources of income, in most cases two years from a tax filing perspective.