The following content is from the well-known journalist Nick Timiraos, often referred to as the "new Fed communication agency" and the "Fed megaphone" of The Wall Street Journal.

The Fed's two-and-a-half-year fight against inflation seems to have been successful, but the outcome may change due to the U.S. election.

Thanks to the rise in interest rates and the significant boost from supply chain recovery and an influx of workers, the inflation rate has declined. However, whether borrowing costs and price growth will continue to slow down next year largely depends on the policy choices of either Trump or Harris.

Both candidates support policies that promote economic growth, which may prevent further decline in inflation. However, economists and even conservative advisors are concerned that Trump's supported views are more likely to spark inflation. This includes his proposals to impose tariffs on imported goods, deport workers, and rely on the Fed to lower interest rates.

Overall, these policies are all leaning towards inflation. Brian Riedl, a former Republican Senate aide who now works at the conservative Manhattan Institute, said, "I am very concerned that inflation will worsen in 2025."

In addition, the economic backdrop of Trump's second term will be very different from his first term, when price pressures have been low and stable for many years. In recent days, bond yields have risen as people anticipate Trump winning the presidency, which may bring higher deficits, inflation, or both in his new term.

Marc Short, who served as legislative affairs director during Trump's term, said that given the changing economic environment and the more far-reaching policies proposed by Trump, there is reason to be concerned that the threat of inflation will be amplified in Trump's second term.

Trump's proposal may lead him into a new conflict with the Federal Reserve, whose task is to maintain low inflation.

Inflation is largely driven by global forces rather than the actions of individual presidents. During Trump's term, the shadow of the 2008 global financial crisis suppressed global demand and price pressures. Shortly after Biden took office, as the United States recovered from the COVID-19 pandemic, inflation started to soar.

Ultra-low interest rates and Biden's fiscal stimulus injected a strong dose of demand into the post-pandemic reopening. All of this collided with paralyzed supply chains and chaotic labor markets. Following the Russia-Ukraine conflict, global energy markets became unstable, and in 2022 the inflation rate reached 9.1%.

As supply issues are resolved, and the Fed raises rates to prevent further overheating or bubbles, the inflation rate steadily decreases. Last month, the consumer price index slipped to 2.4%, nearing pre-pandemic levels. Looking ahead, global trends are likely to continue to be a major driver of inflation, and presidents can take actions to increase or decrease these forces.

Harris commits to addressing the cost of living crisis by promoting residential construction, combating suspected price gouging, and expanding tax breaks for families with young children. She pledges to offset any new spending by increasing taxes or other revenues but does not propose substantial deficit reductions.

Riedel said, "If Democrats continue to hold power, I don't think you will see a sharp rise in inflation, but we may find that inflation remains somewhat sticky and stubborn."

Trump hopes to extend the 2017 tax cuts beyond 2025 and further reduce corporate tax rates. He also proposes eliminating taxes on worker tips, overtime pay, and retiree social security benefits. In terms of trade and immigration policies, the president has greater flexibility without seeking approval from Congress. These factors make Trump a bigger uncertain factor. "If he follows through, he will bring negative supply shocks to the U.S. economy. Prices will rise, and the economy's ability to supply goods and services will decline," said Adam Posen, President of the Peterson Institute for International Economics.

The potential impact of Trump's immigration policy.

A study by the Peterson Institute estimates that expelling immigrants will significantly reduce economic output, while exacerbating inflation. Due to the reduced available workforce, businesses either have to raise wages and prices or accept lower profit margins.

Supporters of the Trump administration's immigration proposal argue that if Americans take on jobs currently done by foreign workers, they will earn more and improve the economy.

Oren Cass, founder of the think tank American Compass supporting Trump's trade and immigration agenda, said: 'If we effectively limit the labor market to American workers, they will receive higher wages, which will lead to higher prices. In my view, this is how the market should operate.'

However, many economists argue that the labor market is more complex and caution against overlooking the chain reaction of labor shrinkage. Economists at the University of Denver in Colorado studied the deportations carried out by the Bush and Obama administrations from 2008 to 2014. They found that for every 1 million unauthorized workers deported from the US, 0.088 million American workers became unemployed.

This is because in certain industries like food processing, agriculture, construction, and the hotel industry, immigrant workers may not necessarily compete with American workers.

If existing workers are expelled instead of hiring more locally born workers, these businesses are likely to reduce production scale. The decrease in sales volume will then lead to a reduction in high-paying jobs held by locally born workers working in industries that serve these sectors.

Impact of Trump's tariffs

Business leaders and economists unanimously agree that American consumers will bear the costs of tariffs. Chief Executive Officer of AutoZone, Philip Daniele, said during last month's earnings call: 'We will pass on these tariff costs to consumers.'

Trump's advisors said that his tariffs will not cause inflation. This may be because a series of more limited tariffs in 2018 and 2019 did not result in inflation, or it may be because he is simply using the threat of larger tariffs to gain leverage.

Senior campaign advisor Brian Hughes said: "Just like in 2016, Wall Street and so-called experts predicted that Trump's policies would lead to economic growth slowing down, inflation... Actual growth and job increases far exceeded these views."

Some conservative economists believe that Trump's promise to cut regulations, especially in the energy sector, could reduce inflation by eliminating production barriers.

Trump's former legislative affairs director Short said that the first term government did not cut spending as promised. He said that similarly, investors have underestimated the risk of the second term government being less friendly to businesses by picking winners and losers.

Short said: "The first term government was very relaxed in regulation, I am not sure if the Trump 2.0 government will be the same, as most people around the president now clearly see that the government will play a broader role in the economy."

The Fed and Interest Rates

For the Fed, understanding the downstream effects of raising tariffs will be complex and unsettling. Any factors that reignite inflation could lead officials to slow down or even halt rate-cutting plans. Just last month, the Fed began lowering rates from their two-decade highs.

Trump has repeatedly called for lower interest rates during his term, and he will be able to appoint a new Fed chairman in 2026. Short expects, "as far as interaction with the Fed is concerned, the president will be very active".

Federal Reserve officials may come to the conclusion that tariffs, similar to taxes, weaken demand. In 2019, higher tariffs disrupted the stock market and potentially hindered business investment. After the Federal Reserve determined that the negative impact of the trade war on economic growth outweighed any inflation effects, it lowered interest rates.

Some believe that the Federal Reserve can remain neutral. At a meeting this summer, Trump-appointed Federal Reserve Board member Waller suggested that if tariffs lead to a one-time price increase, "this seems to be the ultimate supply shock, to which the central bank should just take a look."

Some officials are concerned that tariffs may trigger inflation. For example, workers may start demanding higher wages due to price increases. The U.S. trading partners may retaliate by imposing tariffs on other products, sparking a retaliatory trade war. Chicago Fed President Evans said in an interview this summer: "To me, this sounds more like inflation than a one-time change in price levels."

In addition, if prices rise, the Federal Reserve may find it difficult to stand still, as officials initially misjudged the 2021 price increase as "transitory." Once price pressures spread, the Fed will actively raise rates to ensure that businesses and workers do not expect high prices to become the new norm.

Director of the Peterson Institute for International Economics, Poulsen, said: "If the second round of inflation appears so quickly after the first round of inflation, it is reasonable to worry that anti-inflation efforts will become more difficult."

The rise in budget deficits is the last worrisome issue. Some analysts are concerned that the increasing spending and tax cut promises of the two candidates will lead to rising deficits, as politicians have underestimated the cost of these promises. Economists say that if the budget deficit decreases, the Fed will be able to further lower interest rates, which would improve the situation in the United States.

The Committee for a Responsible Federal Budget estimates that Harris will increase the deficit by approximately $3.5 trillion over the next decade, while Trump will increase it by $7.5 trillion.

For Trump, the increase in deficits and the immigration and tariff policies that stimulate inflation could trigger a chain reaction in the bond market, where investors would demand higher yields to compensate for the risk of holding government bonds.

Former World Bank President and senior official in the trade and State Department during the Bush era, Robert Zoellick, said: "If he (Trump) starts getting into a fight with the Federal Reserve, and if countries start retaliating with tariffs, when will the market truly become tense? This could trigger some economic explosions. Once you start releasing these forces, things will escalate rapidly."

Trump's running mate and Ohio Senator JD Vance said he is somewhat concerned about how global bond investors would respond to Trump's second term.

"Are the bond markets, international investors... trying to overthrow Trump's presidency by stimulating a surge in bond rates?" Vance said last month in an interview with conservative political commentator Tucker Carlson.

He emphasized how the turmoil in the UK bond market two years ago led to the resignation of former Prime Minister Liz Truss. He said: "Interest rates skyrocketed and within days, her government collapsed."

Editor/ping