The 2024 US elections: Economic implications

Summary

Election Day is in the rearview mirror. Although the outcome of every race has not yet been determined, the outlook for control of Congress and the White House has become considerably clearer. Donald Trump has been elected President of the United States.Republicans have picked up a majority of at least a few seats in the Senate. Control of the House of Representatives has not yet been officially called, but it appears more likely than not Republicans will hold onto their majority in the lower chamber of Congress.

We will publish an in-depth discussion of our post-election forecast in our 2025 Annual Economic on November 21. For now, as the dust continues to settle, we walk through our preliminary thoughts on the election results and their implications for the U.S. economy.

Tax & Spend Policy: An extension of the expiring provisions of the 2017 Tax Cuts and Jobs Act (TCJA) is already baked into our existing economic forecast. As a result, a full extension enacted some time next year, should that occur, would not have an impact on our forecasts for economic growth, inflation, the federal budget deficit, etc.

Some additional tax cuts seem probable in our view, although the timing, size and specifics are highly uncertain. New tax cuts of a similar size to the original TCJA probably would lead us to upwardly revise our forecasts for real GDP growth and inflation by a couple of tenths of a percentage point in 2026 and 2027, all else equal.

Trade Policy: President-elect Trump has proposed a 10% across-the-board tariff on America's trading partners with a 60% tariff levied on China. If implemented shortly after Inauguration Day on January 20, these tariffs would impart a modest stagflationary shock to the U.S. economy in 2025. Our model simulations show that the core CPI inflation rate next year would shoot up from its baseline value of 2.7% to 4.0%. Under this scenario, U.S. real GDP would rise by a sluggish 0.6% in 2025.

Of course, President-elect Trump may decide not to impose tariffs that are so high, and he may not do it so quickly upon taking office. Furthermore, we view these estimates as closer to an upper-bound than a midpoint of the range of possible outcomes. That said, we are inclined to push up our core CPI inflation forecast for 2025, currently 2.7%, given the balance of risks.

Tariffs would directionally offset the boost to economic growth from tax cuts but would further add to the inflationary impulse from tax cuts. Thus, although we may reduce our economic growth forecasts for the next couple of years due to higher tariffs, tax cuts could serve as a mitigating factor. Finally, tariffs increase federal revenues, suggesting they might help limit deficit widening from extending and expanding the TCJA.

Federal Reserve: Our current forecast looks for the FOMC to cut its target range for the federal funds rate, currently 4.75%-5.00%, to 3.00%-3.25% by the end of next year. However, the FOMC may not want to ease policy by that much if new tax cuts and tariffs cause inflation to shoot higher over the next couple of years. Thus, we think the risks to our fed funds rate forecast are skewed to the upside (i.e., less easing next year than we currently project).

The FOMC's reaction function likely would be more hawkish in response to higher inflation from tax cuts than from tariffs. Tighter monetary policy is an effective method for slowing demand growth, but it cannot do much to combat inflationary pressure from a supply shock such as tariffs.

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