President Donald Trump is radically altering the American economy with populist policies—smaller government, protectionism and stricter limits on immigration. These have consequences for growth, inflation, interest rates and investors.

International Trade Policy

The WTO was founded on the most-favored-nation principle that each member country levies the same tariffs on other member countries’ exports unless they are parties to a free trade agreement. Trump’s tariffs effectively abrogate these agreements.

As with other taxes, boosting tariffs raises prices for the imported items and their domestic substitutes and increases the risk of a recession that may be mitigated by Congress lowering other taxes.

Monetary & Fiscal Policy

For now, the Federal Reserve is taking a cautious posture toward inflation and employment and will likely hold interest rates steady.

Inflation for services, which accounts for 61% of the Consumer Price Index, is running stubbornly high at 3.7%. Goods inflation, less food and energy, was negative through July, but generally has been positive then.

New tariffs will push headline inflation closer to 3.5% than 2% and that should make the Fed hesitant about lowering interest rates further.

The reconciliation package moving through Congress indicates tax cuts and increased defense and border enforcement spending will add significantly to the budget deficit, keeping it close to 7% of GDP from 2026 to 2028.

More demand will push up against the limits of the labor markets and further boost inflation.

Either the Fed prints money to absorb the additional debt or bond markets will push up interest rates further.

Longer term, investors should plan for a combination of elevated interest rates and inflation.

Deportations & US Labor Force

The U.S. economy suffers from industry-specific labor shortages even with 7.2 million unemployed, because either native born and legal immigrant jobseekers don’t want to do the work that needs doing—picking lettuce, butchering in meatpacking plants or laboring in construction—or lack skills for openings in industries from shipyards to data centers.

The first-term Trump and Biden economies accomplished 2.5% annual growth by boosting the federal deficit from 3.1 % in 2016 to 6.4% in 2024 and by first mopping up lots of unemployed Americans and then adding immigrant workers with President Joe Biden’s open border.

Legal and illegal immigrants added 5 million new workers from 2020 to 2024.

It’s doubtful Trump will be able to deport many more than 3 million illegal immigrants. If the Democrats win back the House through special elections for vacated Republican seats or in 2026 midterms, the pace may be slower owing to pushback on needed funding for his efforts.

As the bad news rolls in about inflation, voters will sour on Trump, and that will further limit support for both tariffs and tougher enforcement on peaceable, working illegal immigrants.

In aggregate, we should still have enough workers—the lettuce in California will get picked.

Investing in an Inflation Nation

With inflation expectations rising, investors may have to live with inflation in the 3% to 4% range but as long as real growth is robust, that should not pose a barrier to good returns on stocks.

The 40-years prior to the Global Financial Crisis, GDP growth and inflation averaged 3% and 4%, the 10-year treasury yield was 7.4%, appreciation on existing homes was 5.6% and the S&P 500 return averaged 10.5 percent.

With the Magnificent 7—Apple, Amazon, Google, Microsoft, Nvidia, Meta and Tesla—having dramatically outperformed the total market in 2023 and 2024, it’s not great portfolio management to bet on them alone as equities recover.

Thematic funds, such as one to ride the Artificial Intelligence craze don’t have a great track record. Hence, it is still prudent to invest mostly in a fund tracking a broad U.S. index like the S&P 500.

The Trump tariffs have been compared to Brexit, which dealt a significant blow to UK growth. But it was also quickly followed by COVID blurring a sorting of its overall effects.

The United States has a much larger, more diversified and globally dominant economy and is better able to absorb such a disruption in supply chains—witness its recovery from COVID as compared to other major economies.

Still with prospects improving in Europe owing to increased defense spending, it’s prudent to add some international diversification—for example, by placing perhaps a quarter of your equities in a broad non-U.S. index fund, such as the Vanguard Total International Index Fund.

Depending on your age, one-fifth to half of your nest egg should be in fixed income assets—high-yield money market accounts like those offered by Vanguard, Treasurys and other high-quality bonds—with staggered maturities ranging to 10 or 20 years depending on when you’ll need cash for college expenses, retirement and other major outlays.

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