Opinion
Donald Trump should be elated.
The incoming president will inherit a full-employment economy, with consumers buoyed by solid real-income growth and confidence about job security. To underscore that, employers added a robust 265,000 new jobs in December, far outpacing economists’ expectations.
Yet bad vibes abound. Stocks, instead of rising on the upbeat job news, slumped because of fears the economy may suddenly be a little too hot.
Last September, moderating job growth and falling inflation allowed the Federal Reserve to start cutting interest rates after an aggressive hiking cycle. Short-term rates are now down by a full percentage point. Investors expected the Fed to continue gradually cutting rates for at least another year or so, as a modest form of monetary stimulus assuring the economy didn’t cool itself right into a recession.
But blowout job growth at the end of 2024 has abruptly shifted that calculus. “Given a resilient labor market, we now think the Fed cutting cycle is over,” Bank of America explained in a Jan. 10 research note. “Economic activity is robust. We see little reason for additional easing. The conversation should move to hikes.”
There’s more to worry about.
Consumers suddenly expect inflation to worsen — and that seems to rest with Trump. “Consumers' inflation worries soared this month,” Oxford Economics reported on Jan. 10, citing the latest University of Michigan consumer sentiment survey. That data shows that respondents expect the inflation rate one year from now to be 3.3%, the highest expected level in eight months. That's also considerably higher than the current 2.7% inflation rate.
That may be because consumers are starting to hear a lot about the tariffs Trump plans to impose on imported products — and they’re worried. One key tell in the Michigan survey is a surge in the portion of respondents expecting appliances and other durable goods to get more expensive in the future.
Consumers “are becoming increasingly worried about future prices, likely due to the uncertainty regarding tariffs,” Oxford concluded.
Consumer psyches vacillate, and they can improve as quickly as they sour. It’s possible Trump could do something once he takes office on Jan. 20 to assure Americans he won’t do things that raise prices.
But markets are pricing in the same worries as consumers — and that is costing people money today. Wall Street is buzzing with theories about why the rate on 10-year Treasury bonds has risen by more than a point since September, during the same period when the Fed lowered short-term rates by a point. Long and short-term rates don’t always move in unison, but it’s very unusual for them to move sharply in opposite directions, as they have recently.