Over the last two weeks, the Trump administration’s economic agenda has come into sharper focus, as two key policy initiatives have advanced. First, on April 2, President Donald Trump announced widespread, universal tariffs on all U.S. trading partners (except for Russia and a small group of other adversaries already levied with onerous sanctions) as well as large, punitive tariffs on China that continue to escalate. Second, Republicans in Congress advanced a budget resolution to double down on President Trump’s supply-side tax agenda, doing so while promising trillions of dollars in unpaid-for tax breaks and enacting massive spending cuts. Taken together, debt-financed supply-side tax cuts on top of widespread tariffs threaten to increase inflation and interest rates higher than they are otherwise projected to be while lowering wages.
By the end of 2024, economic trends were moving in the right direction. Inflation had fallen dramatically since the middle of 2022, while unemployment stayed low and wage growth outpaced price increases, especially among lower-wage workers. This created an environment in which the Federal Reserve felt safe to start lowering interest rates. Delinquencies on consumer credit were basically flat throughout 2024. In addition, people started to feel better again about their finances even before the presidential elections in November 2024.
Americans are, once again, rightfully worried about inflation and interest rates. Higher prices leave less money in people’s wallet—at the same time the tax cuts are lowering the growth of take-home pay. For many families, a high debt burden can cause financial pain, as some become unable to pay their financial obligations such as credit card and car loans with high interest rates. And, for many other families, higher interest rates mean that their dream of owning their own home is deferred.
In the end, working families will see more economic pain through higher prices for everyday goods, from food ,to medicine, and cars. In fact, they’ll see economic pain through lower wages earned. And, borrowing on credit cards—for cars, education, and buying a new home—will be more costly.
Trump’s tariffs will raise both inflation and interest rates
Year-over-year price increases had fallen from 9.0 percent in June 2022 to a low of 2.4 percent in March 2025, before tariffs went into effect. The Trump tariffs will reverse all of this progress by disrupting supply chains and making almost all imports more costly. This is a twofold blow on inflation. U.S. companies have to pay more for their inputs, if they can still afford them. And families will have to pay more for everything, from strawberries to cars.
There is also a longer-term effect on inflation from the tariffs. They will reduce U.S. innovation and productivity growth. Yet, it was much faster productivity growth in 2023 and 2024 that helped to bring down inflation while keeping wage growth high. Companies will invest less because they have no idea where tariffs are heading and, thus, cannot plan for future expansions. Moreover, tariffs will hit smaller companies harder than larger ones. This will directly reduce the dynamism among small businesses and could lead to more corporate concentration—meaning, larger companies will get even larger. Many of those behemoths can use their power over prices to generate profits without investing more because they can raise prices or, at least, keep prices high. What will people do other than to pay higher prices if they need to buy food, for instance, and there are fewer choices of products?
Extending the Tax Cuts and Jobs Act would only push interest rates and inflation higher while lowering wages
Extending the Tax Cuts and Jobs Act (TCJA)—the benefits of which favor high-income earners—will blow the lid off federal budget deficits. Reasonable estimates show that extending the TCJA will add $5 trillion or more to the federal budget deficit over the coming decade. Estimates from a number of different sources—including the Congressional Budget Office, Moody’s and Yale’s Budget Lab—show that the tax cuts will keep inflation and interest rates higher than they otherwise would be. The inflationary pressure comes from an increase in household consumption among high-income households because of the tax cuts. Higher inflation could also come from Congress repealing clean energy incentives, which would increase household electricity costs.
Inflationary pressures will persist over the longer term. Trickle-down, or supply-side, tax cuts never live up to their hype. They are, theoretically, meant to boost investment by giving rich people and corporations more money, thus making it cheaper to invest. But, time after time, the extra money has gone to shareholders in the form of dividend payouts and stock buybacks. Investment growth has tended to be rather lackluster in the wake of past such tax cuts. For example, those passed under President George W. Bush in 2001 and President Trump in 2017 failed to stimulate investment. Without an investment bump, though, there is no productivity increase. And without productivity gains, there can be no beneficial impact on inflation. In the end, the country is left with inflationary pressure amid massive deficits.
The combination of inflation and deficits will keep interest rates higher than they otherwise would be. The first—and most obvious—mechanism runs through the Fed. When inflation picks up again or fails to slow down, the Fed will play it safe. This will mean the Fed may choose to keep higher interest rates in place for longer than it otherwise would have. And this will lower productivity, lowering Americans’ wage growth—so much so that, in the long run, these deficit-financed tax cuts will actually result in lower after-tax income.
A crucial aspect in this “playing-it-safe” policy by the Fed is also the massive uncertainty created by President Trump’s “will he/won’t he” approach to tariffs. Economic data will be hard to interpret, leaving the Fed to guess what will happen to inflation. Fed chair Jerome Powell has already said that the Fed will keep interest rates in place until there is more clarity about tariffs and other economic policy steps. The Fed will choose to approach interest rate cuts more cautiously in a world of heightened risk and erratic economic policies due to fear of guessing wrong.
Even without Fed action, there will be upward pressure on longer-term interest rates. The tax cuts will cause massive federal government deficits. The government needs to finance that debt by issuing new bonds. The demand for money will push interest rates higher. Estimates on the effects of the Trump tax cuts suggest that each 1 percentage point increase in primary (or noninterest) deficits as a percentage of GDP could cost consumers $600 more in interest on their home loan or, a business, $1,000 more on a small business loan, according to the Yale’s Budget Lab.
Chaos and economic uncertainty are a bad sign for the economy
This is not all there is to higher interest rates. Trump’s chaotic approach to tariffs creates enormous uncertainty about the outlook for U.S. businesses and their profits. Nobody knows which companies can absorb higher costs. Many will not—and will fail. It is equally uncertain what will happen to U.S. exports, since it’s impossible to know the result of retaliatory tariffs. Again, many companies will falter because they lose access to overseas markets. In the same vein, it is also unclear how large the U.S. government deficits will really be. They could be much larger than expected depending on the size of congressional Republicans’ inefficient supply-side tax cuts and what spending cuts they are able to agree on. And, there is also a lot of unpredictability about what will happen to imports and tariff revenue. In short, there are many factors at play in an uncertain economy. Domestic and international investors will want to be compensated for that extra risk of companies failing and government deficits staying even higher. They will demand higher interest rates to offset those additional risks. In fact, interest rates on longer-term debt, such as federal government treasury bonds, rose during the chaotic days before and after President Trump rescinded part of his punitive tariffs. While there are no definitive explanations for the increase in interest rates, they could remain high as uncertainty over tariffs and the size of deficits associated with the tax cuts persists.
A lot of things are uncertain in economic policy right now. But, there is strong economic evidence to indicate that both the Trump tariffs and the congressional Republican tax proposal would keep prices and interest rates higher than they otherwise would be. In the end, families would face higher costs, greater risk of debt delinquency, and more hurdles for buying a home.