The Federal Reserve is holding the federal funds rate steady while looking for signs that inflation is moving closer to 2% but the bond market is betting that President Donald Trump’s policies will undercut its efforts.

Last fall, the Fed lowered the overnight borrowing rate a percentage point, but the 2- and 10-year Treasury rates are up about 0.4% and 0.7%. Those importantly help determine rates for credit cards, auto loans and mortgages.

President Donald Trump says he’ll contain inflation “by unleashing American energy, slashing regulation, rebalancing international trade, and reigniting American manufacturing,” but his program threatens to accelerate inflation and send interest rates even higher.

Deregulation is a slow process. Administrative law often requires publishing new rules, public comment periods and defending against legal challenges in court.

The first Trump Administration added fewer new regulatory costs than either the Bush or Obama Administrations, but its efforts to roll back predecessors’ edicts often met with frustration.

Trump may buy out and fire a lot of federal workers, but reducing headcounts will likely slow businesses’ applications for regulatory approvals, technical assistance and government-supported loans from overburdened bureaucrats.

A much smaller government, without fewer rules and reporting requirements, will raise private sector costs and prices, not lower them.

Trump can make drilling and pipelining petroleum easier but in recent years, crude oil has fluctuated between $70 and $90 a barrel. Nowadays, it is nearer the bottom of that range and the industry is more disciplined about drilling too much, letting prices fall much further and suffering losses.

Trump may get more production for LNG to exports, but don’t count on gasoline falling much below its current $3 a gallon national average without a recession.

As for Trump’s tariffs, two points are paramount.

First, import taxes can’t shrink the 3.2% of GDP goods and services trade deficit without an improvement in the balance between government plus business investment and household savings plus corporate retained earnings.

Americans don’t save enough, and the gap must be filled by borrowing abroad, which permits Americans to consume more than they produce via an international trade deficit. Unless Trump significantly cuts spending or increases taxes, that won’t change.

The national savings gap may increase because of the prodigious sums businesses are spending to develop and deploy artificial intelligence, and the pinch higher prices has imposed on working- and middle-class families. A disproportionate share of retail sales growth has been among the upper income households enjoying home equity and stock market gains.

Congressional Republicans want to extend the 2017 Tax Cut and Jobs Act beyond this year and accommodate Trump’s promises to cut taxes on corporate profits, tips, overtime pay and Social Security benefits.

Those could raise the federal deficit to as much as 8% of GDP, increase aggregate demand but only marginally increase supply, boost inflation and awaken the bond market vigilantes.

Second, significant tariffs on imports and retaliation—for example, Canada limiting energy and lumber export into our markets—would encourage more U.S. resource development and manufacturing but at higher costs and prices.

U.S. goods imports are about 11% of GDP. If half of a 20% average tariff were passed on to purchasers, that would raise consumer prices 1.1% and take inflation to about 4%.

Ordinary Americans sense these things, and the average of expectation for inflation over the next year, as measured by the Conference Board, University of Michigan and the New York Federal Reserve, remains above 3 percent despite Fed assurances.

That motivates workers to seek higher wages in job searches and businesses to raise prices in anticipation of higher costs. It’s a vicious cycle that both President Joe Biden and Trump ignited when they doubled the federal deficit from 2016 to its current levels.

Illegal immigrants likely filled about half of the 2.6 million jobs the economy created from the summer of 2023 to the end of last year.

Trump’s initial focus on deporting criminals won’t greatly affect that supply of workers, but the fear factor—illegal immigrants lying low and fewer migrants trying to enter the country—could reduce overall labor force growth by half.

Few unemployed Americans want or are even available for the jobs many deported illegal immigrants will vacate in agriculture, food processing, construction, family services and hospitality. Prices for food, rent, childcare, restaurant meals and other services will rise.

Trump is moving fast and breaking things but sowing more chaos than progress.

In the bargain, he could make inflation and interest rates unmanageable and the Fed’s job undoable.

_______________

Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.