Tariffs, Immigration and Crypto (Oh My?)
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Love him or hate him, Donald Trump is queued up to become the nation’s 47th president. In true Trump style, he’s got big plans for his second stint— and some of those plans suggest impactful market shifts may be on the way.
Trump was recently quoted as saying that he feels “the most beautiful word in the dictionary is tariff,” and his proposal for the coming term bears that out. While new tariffs were established during his first term, these purport to be broader in scope and scale. What could we expect if these were implemented?
It’s tricky to say precisely how the tariffs from his first term affected the economy, as they were imposed just before the outbreak of the COVID-19 pandemic. With the resulting supply chain issues and drastic changes in consumer spending, far more significant factors were at play. But we do know that by their very nature, tariffs increase the cost of goods imported from targeted countries— which is likely to spell inflation.
“Previous tariff increases weren’t as dramatic and had little inflationary impact, but adding tariffs at the scale being discussed would have inflation implications,” explains Rob Haworth, senior investment strategy director with U.S. Bank Asset Management. The Consumer Price Index recently reported a tick-up in inflation rates for the second consecutive month in November, and consumers are still adjusting to higher post-pandemic prices.
The president-elect’s proposed immigration policy is another potential inflation-stoker. Nearly a fifth of the U.S. labor force comprises foreign-born workers, meaning Trump’s planned deportations could drastically affect the labor market. Alan Auerbach, a professor of economics at UC Berkeley, posited that agriculture and food processing would be the hardest hit. What follows would likely be more cost-of-living increases.
With all this in mind, the Federal Reserve has been preparing to change its tack. Although their ongoing fight against inflation was set to ease with a plan for rate cuts in 2025, Federal Reserve chair Jerome Powell announced on Dec. 18 a much more cautious approach in anticipation of Trump’s policy changes. The danger, of course, is in keeping borrowing costs too high for businesses to afford to grow.
On the other hand, these protectionist policies are designed to help American companies and workers thrive in the long term. Tariffs can help domestic producers price competitively while offering their employees a decent wage. Companies with outsourced manufacturing may be enticed to move operations to the U.S., which could improve unemployment along with a tighter labor market.
Cryptocurrency may be another area affected by Trump’s presidency. It has already seen impressive gains since November 5. Having launched a crypto platform himself, Trump embraced digital currency during his campaign and is expected to buoy its growth through deregulation. He’s also mentioned plans for the government to hold a Bitcoin strategic reserve, which could further legitimize the ethereal currency’s value. It will be interesting to see how that might ultimately benefit or detract from individual crypto holders’ wallets.
After all the twists and turns the first quarter of the 21st century brought us, there are bound to be more surprises ahead. Expected results of a new administration’s policies are often quite different from reality, sometimes wholly the opposite. So, as we ride out whatever volatility the market may weather, trust your coach— and keep your eye on the ball.
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A cryptocurrency is a digital or virtual currency that uses cryptography for security. A defining feature of a cryptocurrency is that it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation. Because cryptocurrencies are virtual and do not have a central repository, a digital cryptocurrency balance can be wiped out by a computer crash if a backup copy of the holdings does not exist. Since prices are based on supply and demand, the rate at which a cryptocurrency can be exchanged for another currency can fluctuate widely.
