[Interview] "The Biggest Risk to the US Economy is Trump... Inflation Could Rise by 2-3%P"

US Economic Outlook New Year Interview
Jonathan Wright, Professor at Johns Hopkins University
Unpredictable Scale and Speed of Trump Policy Implementation
Tariff Increases and Immigrant Deportations May Push Up Prices
US-China Conflict Escalation Also a Risk Factor
If China Sells Large Amounts of US Treasury Bonds, Bond Market Turmoil Could Occur
Fed Expected to Cut Interest Rates 2-3 Times This Year

"The tariffs and immigration policies of the second Trump administration could cause U.S. inflation to rise by up to 2-3 percentage points this year. If the U.S.-China conflict worsens and China retaliates by selling off its large holdings of U.S. Treasury bonds, financial market turmoil is expected."

Jonathan Wright, a macroeconomics expert and professor in the Department of Economics at Johns Hopkins University, stated this during a New Year's video interview with Asia Economy on the 1st (local time). He said, "Policy uncertainty under the second Trump administration is the biggest risk factor for the U.S. economy this year."

He evaluated the current U.S. economic situation, which is showing a robust recovery unique in the world, as very strong. The labor market avoided recession contrary to initial expectations, and inflation outlook is also positive. However, he said the scale and speed of implementing the policies promised by President-elect Donald Trump, who will be inaugurated on the 20th, are "unpredictable," making it unclear whether the U.S. economy will succeed in a 'no landing' scenario.

Jonathan Wright, a professor of economics at Johns Hopkins University in the United States, is conducting a New Year's interview with Asia Economy via video call. New York - Photo by Kwon Haeyoung

He identified four major factors likely to cause the most concerning 'Trumflation' (inflation caused by Trump's policies) this year: ▲tariff increases ▲illegal immigration bans ▲tax cuts ▲interference with monetary policy independence. Professor Wright said, "It is highly likely that the second Trump administration will raise tariffs and pursue expansive fiscal policies along with large-scale attempts to deport immigrants," adding, "There is also a possibility of pressure toward easing monetary policy by the Federal Reserve (Fed), the U.S. central bank." He warned, "All these factors could push inflation, which is still somewhat high but stabilizing, back up."

He also predicted that if U.S.-China tensions deepen under the second Trump administration, China, the second-largest holder of U.S. Treasury bonds, could cause significant shocks to the U.S. and global financial markets through retaliatory measures such as massive sales of U.S. Treasuries.

Concerns Over Inflation Due to Tariff Increases and Illegal Immigrant Deportations

Professor Wright forecasted that tariff hikes and illegal immigrant deportations under the second Trump administration, launching this month, could push prices up through increased import costs and labor expenses. He said, "If the second Trump administration imposes a universal 20% tariff on all imports and a 60% tariff on Chinese goods as promised, the Consumer Price Index (CPI) inflation rate could rise by 2-3 percentage points annually," adding, "This would be a highly inflationary measure." He also noted, "Immigration inflows have continuously increased jobs in the labor market by 150,000 to 200,000 per month, but if immigration stops or decreases under the second Trump administration, job growth could fall below 50,000 per month," and warned, "If the second Trump administration immediately deports all illegal immigrants, it could cause serious disruption to the labor market and economy." However, he considered extreme measures like full deportation of illegal immigrants "realistically difficult."

He explained that concerns about Trumflation this year mean that the extent of inflation will vary depending on the targets and scope of tariff increases and the scale of illegal immigrant deportations. Some argue that even if inflation remains limited, the uncertainty of trade, immigration, and economic policies under the second Trump administration is increasing financial market volatility and placing a heavy burden on private companies' investment decisions.

Despite President-elect Trump’s pledge to create a 'Government Efficiency Department' and cut federal government spending, fiscal deficits are expected to widen further. Professor Wright said, "Trump plans to cut federal government spending along with tax cuts, but he has stated that he will not reduce major spending items such as Medicare, defense, and Social Security, which make up most of the budget," adding, "As a result, tax cuts and spending cuts will not balance, leading to an expansion of the fiscal deficit." He continued, "The fiscal deficit ratio to U.S. GDP is 6.5%, which is excessively high given the current full employment state," and expressed concern, "The U.S. has the privilege of borrowing in its own currency, so it can currently handle the deficit, but this fiscal situation is not sustainable in the long term."

China May Retaliate by Selling U.S. Treasuries... Fed Expected to Cut Rates 2-3 Times This Year

Another risk factor expected under the second Trump administration, according to Professor Wright, is the expansion of U.S.-China conflicts. He predicted that if the U.S. raises pressure on China, including imposing a 60% ultra-high tariff, China will look for other 'weak links' beyond retaliatory tariffs. Since China does not import large volumes from the U.S., retaliatory tariffs may have limited effect, prompting consideration of more destructive measures.

He said, "China holds a large amount of U.S. Treasuries and plays an important role in financial markets," and forecasted, "If China retaliates by selling U.S. Treasuries, it could put upward pressure on Treasury yields and cause turmoil in the bond market." As of October last year, China's holdings of U.S. Treasuries stood at $760 billion, second only to Japan's $1.102 trillion. Although it reached $1.27 trillion in 2013, China has rapidly reduced its holdings since 2018 when U.S.-China conflicts intensified. Especially under the second Trump administration, with expected inflation increases and fiscal deficits leading to prolonged high interest rates, if China also sells off large amounts of U.S. Treasuries, already soaring Treasury yields could spike further, causing significant shocks to financial markets. The 10-year U.S. Treasury yield, a global bond yield benchmark, rose from around 3.9% in early January last year to nearly 4.6% currently.

He also mentioned the possibility that China might control exports of critical minerals needed for semiconductor and electric vehicle battery manufacturing.

Regarding monetary policy this year, Professor Wright expects the Fed to cut interest rates 2-3 times. In December last year, the Federal Open Market Committee (FOMC) lowered the benchmark rate to 4.25-4.5% and significantly reduced the expected number of rate cuts in 2025 from four times (total 1.0 percentage point cut) to two times (total 0.5 percentage point cut). He said, "Inflation figures are higher than expected and the labor market remains strong," and predicted, "It is highly likely that the Fed will cut rates two or three times this year." Regarding the current rate level, he explained, "It is at a restrictive level that suppresses economic growth and inflation," adding, "If rates fall to about 4%, it may reach a neutral rate that does not constrain the economy, so the Fed will be cautious about further rate cuts."

He also noted that concerns remain about President-elect Trump's potential threats to the Fed's independence, as he has repeatedly 'interfered' with Fed monetary policy. He said, "Since Trump does not want actions that cause negative reactions in the stock market, I cautiously hope he will not provoke conflicts with Fed Chair Jerome Powell that would harm the stock market after taking office," but added, "We cannot completely rule out the possibility of interference with the independence of the monetary authorities."

About Professor Jonathan Wright

Professor Jonathan Wright is a U.S. macroeconomics expert focusing on econometrics, macroeconomics, and finance. He has worked as a Fed economist and a professor at the University of Virginia. In 2006, while a Fed economist, he published a paper titled 'The Yield Curve and Predicting Recessions,' presenting a model that calculates the probability of a recession over the next 12 months using three variables: the yields on 10-year and 3-year U.S. Treasuries and the current federal funds rate. He earned his Ph.D. from Harvard University.