Introduction
NEW YORK – Since the election of President Donald Trump last year, I have maintained that some of his policies will eventually lead to greater growth and lower inflation. This applies to his support for technological industry innovation, deregulation, lower taxes on labor and corporations, improved energy production, and cuts to wasteful public spending.
Trump’s Stagflationary Policies
However, other Trump policies are stagflationary. Protectionism and tariffs will slow growth and push prices up, just like the hard stance on immigration, cuts to scientific research funding, attacks on academic institutions, support for budget deficits without corresponding revenue, threats to the Federal Reserve’s independence, haphazard attempts to weaken the dollar, assaults on the rule of law, and corrupt behavior.
Market Discipline and Federal Reserve Independence
Despite these stagflationary policies, market discipline (especially from bond watchers) and an independent Federal Reserve will limit these policies, giving an advantage to Trump’s moderate economic advisors and leading to a de-escalation of trade tensions through negotiations. This has already occurred, and now that Republicans in Congress are negotiating a budget bill that will further increase deficits and debt ratios, market pressure (through higher long-term bond yields) will increase.
Trump’s Previous Attacks on the Fed
It is worth remembering that Trump’s initial attacks on the Federal Reserve’s independence were counterproductive. US stocks plummeted, bond yields soared, and Trump stopped threatening to fire Fed Chair Jerome Powell. Although he can replace Powell in 2026, the Fed will remain independent because the president is first among equals, not an absolute monarch. The overall stance of the Federal Open Market Committee will still reflect its members’ opinions.
Powell’s Support for Trump
Currently, Powell is doing Trump a favor by not cutting interest rates. The Fed is credibly anchoring inflation expectations amidst price pressures induced by tariffs. By refraining from cutting rates now, the Fed preserves the option to do so if the economy weakens later in the year. Trump has no reason to attack Powell, except to blame him for a potential recession he himself might have caused—just as he will blame China’s President Xi Jinping for inflation due to his stubbornness.
Immigration Policies and Their Impact
Trump’s restrictions on immigration—and thus labor supply—will also be counterproductive. The 2023-24 period saw robust growth and falling inflation due to a significant increase in labor supply through (partly undocumented) immigration. With a tight labor market, policies reducing the workforce will drive up wages and inflation, harming the economy and Trump’s political standing—similar to how pandemic-era inflation affected Joe Biden.
The Need for Immigration
The US needs a steady flow of immigrants (preferably documented). Trump sided with Elon Musk on H-1B visas for skilled workers (a program heavily relied upon by Silicon Valley). By challenging his nativist MAGA base, Trump demonstrated an understanding of the need to attract foreign talent. Despite the broader damage Trump is inflicting on the US brand, the country remains a top destination for 10% of the world’s scientific researchers and entrepreneurial talent due to the three to five times higher compensation offered in the US.
Maintaining US Dominance
However, cutting research funding and allowing a brain drain is inconsistent with maintaining US dominance in AI and other future industries. In this case too, industry reactions and market discipline will support Trump’s advisors who have a cooler head. Growing legal challenges to the administration’s deportation policies may eventually push it toward more sensible immigration policies. Otherwise, market discipline will strike back forcefully.
Currency Manipulation Attempts
Trump’s efforts to boost US competitiveness and reduce the trade deficit through a weaker dollar might also backfire. When tariffs announced on April 2nd, threats to fire Powell, and anticipation of larger fiscal deficits caused the dollar to start falling, there was a strong stock market correction and a rise in long-term bond yields and credit spreads. Trump wisely backed off tariffs and Powell, and market discipline will force a fiscal adjustment—as seen in other advanced economies and emerging markets in recent years.
The “Mar-a-Lago” Agreement
The idea of a “Mar-a-Lago” agreement to orchestrate an orderly dollar weakening is ludicrous, bordering on insanity. Major trading partners—especially China—would never agree, and even US allies would oppose it. The longer markets expect a sudden dollar devaluation, the higher bond yields will climb. Proposals to convert non-resident Treasury short-term holdings into long-term securities wouldn’t work in theory or practice. Weakening the dollar through capital controls—a tax on foreign holdings of Treasury bonds—would almost certainly raise long-term rates and weaken the economy. Market watchers won’t permit such unsustainable policies for long.
Resilient Democratic Institutions
While Trump’s assault on the rule of law has been quite aggressive, US democratic institutions—starting with independent courts and judges—and civil society remain strong and should be able to limit more extreme policies. Once again, don’t underestimate the power of market discipline. In other countries—like Turkey—where autocrats have undermined the rule of law, market reactions have been merciless.
Conclusion
In the end, either Trump reverses his stagflationary policies to focus on growth-promoting measures, or financial tension and a recession will cause the Republican Party to lose midterm elections in 2026. It is hoped that Trump listens to the market and abandons his worst instincts. He should recognize that homegrown technological innovations promise to significantly boost US growth potential. All he needs to do is steer clear of his own path.
About the Author
Nouriel Roubini, principal advisor at Hudson Bay Capital Management LP and emeritus professor at New York University’s Stern School of Business, is the author of most recently, Megathreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them (Little, Brown and Company, 2022).
Copyright: Project Syndicate, 1995 – 2025
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