Tariffs are another supply constraint on the economy. These are taxes that will be paid by US importers (usually wholesalers and retailers) when products enter the US. They then decide whether to absorb the additional costs or pass them on either in part or in full to the customer.

In 2018, the Trump administration introduced a 20 percent tariff on all imported large residential washing machines. According to the Consumer Price Inflation Report, there was no impact in the first four months as retailers used up existing stocks that had not been subject to the tariff, before raising consumer prices by 12% in the following months. Since the US manufactures washing machines that are not subject to tariffs, it appears that consumers have borne more than 60% of the tariff cost for foreign-made appliances, with the rest being absorbed by retailers’ profit margins or through price cuts by manufacturers foreigners. Prices gradually fell again as the substitution of buyers for domestically produced washing machines took place and it is likely that foreign manufacturers agreed to further reduce prices.

Under a larger aggressive tariff plan, it may be more difficult to immediately replace domestically manufactured products due to capacity constraints. Consequently, the hit to retailers’ profit margins and the erosion of household spending power from higher inflation could be significant in an economy where consumer spending accounts for 70% of all activity. US manufacturers should become more price competitive and benefit, but many also use imported components, so they also face higher costs and it will take time to build a US manufacturing plant.

Moreover, retaliation from foreign countries is to be expected, which will create challenges for American exporters and manufacturers. If we see weaker global demand due to escalating trade tariffs, it could mean less investment and fewer jobs, not more as Trump expects.

The biggest headwind to growth over the medium term is likely to come from higher US government borrowing costs, which are driving up borrowing costs for consumers and businesses in general. The bipartisan Committee for a Responsible Federal Budget estimates that Trump’s policy mix of tax cuts, tariff increases and spending changes will add $7.75 billion to the US national debt over the next 10 years compared to current projections of the Congressional Budget Office.

The US is already running a fiscal deficit of nearly 7% of GDP this year, and the debt-to-GDP ratio is 100%. Fiscal sustainability concerns, we believe, will lead investors to demand a higher term premium on long-term US government borrowing, raising the cost of borrowing more broadly in the economy – note that the sizable increases in Treasury yields as markets price from ever higher for a Trump. victory. We suspect that the economic implications of low population growth, global trade protectionism and the prospect of higher borrowing costs will make it difficult for the US economy to grow fast enough to generate tax revenue to fully cover Trump’s tax plan.

At the same time, the Federal Reserve may feel that if fiscal policy is to be loosened relative to their previous benchmark forecasts, then they need to tighten monetary policy, which implies a higher neutral interest rate to keep inflation at the target of 2 %. A higher inflation environment due to tariffs could amplify the risk of a higher and steeper yield curve over the next four years compared to what the US economy experienced in the previous decade.

That said, we must remember that Jerome Powell’s term as Fed Chair ends in February 2026, and with Republicans controlling the Senate, President Trump has an easy path to nominating and installing a candidate who is more willing to frame views on interest rate policy. An example might be a more accommodative Fed that is willing to adopt some form of “yield curve control” if higher Treasury yields threaten to undermine the growth story. However, such action risks damaging the credibility of the central bank, potentially causing an adverse market reaction.

Of course, what Trump proposes on the campaign trail and what he ultimately delivers as president may be very different. Our view is that while the near-term growth trajectory looks good, the more aggressive it is with fiscal and immigration policies, the more challenges it could pose for the US economy over time.