The U.S. economy is pulling ahead of its global peers. Inflation is moderating, and the Federal Reserve is cutting interest rates.
Add in a decrease in unlawful southern border crossings and revved-up domestic production in several critical industries and they amount to a rough list of Donald J. Trump’s campaign promises.
It’s a list of economic wins that Mr. Trump is inheriting in large part because of policies that the Federal Reserve and Biden administration have pursued in recent years.
The economy is doing better than most economists predicted a few years ago. Forecasters widely warned that the Fed would seriously harm the economy as it tried to control runaway inflation by sharply raising interest rates in 2022 and 2023. Instead, price increases have come down substantially without a broader implosion. The unemployment rate is low. Consumers are spending.
“The U.S. economy has just been remarkable,” Jerome H. Powell, the Fed chair, said during a news conference on Wednesday, after the Fed cut rates for a third time this year.
But a variety of risks — some sheer happenstance, some floated by Mr. Trump — could interfere with that rosy outcome just as the newly re-elected president takes office.
A Fed Risk
Mr. Powell’s news conference underscored that one economic wild card is central bank policy, which hinges on the outlook for inflation.
After moderating sharply in 2023 and through much of 2024, price increases have been stickier than expected in recent months. That was one factor that prodded Fed officials to revise their inflation forecasts higher for next year.
But recent lackluster progress on price gains isn’t the only reason to worry about the inflation outlook. One-off shocks have repeatedly pushed up price increases in recent years and remain a concern: For instance, egg prices have been heading up again amid a bout of bird flu.
Economists have also warned that Mr. Trump’s own policies could lift inflation.
In particular, the president-elect has promised to slap large tariffs on American trading partners, particularly China, a move that could raise consumers prices for imported goods.
Fed officials do not have a good sense yet of what Mr. Trump’s policies will encompass or how much they might add to inflation. But if they push up prices, that could prevent officials from cutting interest rates as much as they would otherwise.
The Fed lowered its policy rate to 4.4 percent on Wednesday in its third and final cut of 2024. That is down notably from 5.3 percent three months ago, but still higher than it was at any point in Mr. Trump’s first term. It is unclear how much more the Fed will be able to cut, but it seems all but guaranteed that there will be fewer rate cuts than were expected just three months ago.
Because higher Fed rates help to keep mortgage rates and other consumer borrowing costs higher, rates that linger near their current levels are likely to feel uncomfortable for Americans looking to buy a house or finance a car.
And families are already seeing the early impact on their stock portfolios. Equity prices plunged on Wednesday as investors braced for a period of sustained higher borrowing costs. The S&P 500 index fell nearly 3 percent, its worst tumble since August. The Dow Jones industrial average fell for a 10th straight day, its longest losing streak since October 1974.
The Big Picture
At the same time, the Fed’s higher-for-longer rate forecasts are a sign of strength: The economy has shown no signs of cracking under the Fed’s recent policy setting.
“The U.S. economy is just performing very, very well — substantially better than our global peer group,” Mr. Powell said this week.
The unemployment rate stands at a historically low 4.2 percent, albeit slightly higher than its 3.7 percent level a year ago. Gross domestic product has been growing at a solid clip, even after being adjusted for inflation. Productivity growth has been robust in recent quarters, people are starting businesses, and consumers still expect to spend.
Those good outcomes probably owe to a combination of luck and judgment.
Inflation in the United States was caused in part by pandemic-related disruptions, and clearing those up helped to cool price increases. Higher interest rates also managed to take excess steam out of the economy without totally deflating it.
That’s in large part because consumer and business spending remained resilient even in the face of higher interest rates, said Kathy Bostjancic, chief U.S. economist at Nationwide. Consumers were benefiting both from government spending during and after the pandemic — which left money in their pockets — and from jumps in stock and house prices over recent years.
When asset prices rise, families feel wealthier, which can make them more willing to spend.
At the same time, Biden administration policies meant to increase domestic investment in manufacturing and chip production have spurred companies to invest and build, further fueling the economy. Factory production is wobbling a bit at the moment, but manufacturing employment is lingering near the highest level since the 2008 financial crisis.
“It’s an economy that adds up to be the envy of the world,” said Diane Swonk, chief economist at KPMG US.
The Inflation Question
Issues that have upset American voters have also begun to fade from view. Chief among them, after a period of rapid immigration into the United States, border encounters have sharply slowed over the year. Experts say that’s due in part to recent policy changes from Mexico’s government and the Biden administration that make it harder for newcomers to cross the border and to stay and work.
And inflation, which has long bedeviled American households, has been fading.
The Fed’s preferred inflation measure climbed only 2.3 percent from a year earlier in its last reading in October, a much slower pace than its peak above 7 percent in 2022.
Put it together and Mr. Trump will be inheriting an economy that already looks much like the one he has been promising — and much better than those in many other countries. While European competitiveness is lagging and China’s growth is lackluster, America’s economy appears to be the outlier.
The question is whether Mr. Trump will be able to sustain it.
While much of the economy’s trajectory hinges on what happens next with inflation and interest rates, the outlook also turns on what economic policies the Trump White House pursues. Economists and Fed officials are particularly focused on what happens with trade.
If tariffs push up consumer prices, the economic moment will be very different from the one that Mr. Trump faced during the trade war he initiated in his first administration. Businesses and individuals have gotten used to ever-rising costs, and might be primed to react by hoarding products or paying more.
“They’re in the context of an economy where the embers of inflation are still smoldering,” Ms. Swonk said. “It can rekindle.”
Mr. Powell acknowledged on Wednesday the uncertainty surrounding the policies that Mr. Trump might pursue and suggested that the central bank needed greater clarity about what might happen before it could determine its response.
“It’s very premature to try to make any kind of conclusion,” he said.
But Mr. Powell nodded to the fact that Fed economists were thinking about the possibilities behind the scenes.
He said that some Fed officials had integrated the possibility of policy changes into their economic forecasts for next year, while others had not, and that the unknowns were inspiring a cautious approach among some central bankers.
“It’s not unlike driving on a foggy night or walking into a dark room full of furniture,” Mr. Powell said on Wednesday. “You just slow down.”
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