Trump Policies Backfire: U.S. Interest Rates and Inflation Both Under Pressure
nashnova research
The Trump administration aimed to lower rates and tame inflation, but tariffs, tax cuts, immigration curbs and energy shocks have pushed in the opposite direction — the 10-year Treasury yield has hit its highest since 2007 and mortgage rates are back above 7%.
What was the White House's plan, and why isn't it working?
Treasury Secretary Bessent laid out a "3-3-3" plan: cut the deficit to 3% of GDP, hit 3% real growth, and boost domestic energy output by 3 million barrels a day. In plain terms = the logic was "borrow less + produce more = rates come down on their own."
Reality check: the U.S. fiscal deficit still runs at roughly 6% of GDP, close to Biden-era levels. The plan's first step never got off the ground.
JPMorgan chief economist Bruce Kasman put it bluntly: given this year's economic performance, the deficit should be narrowing — "but the budget deficit hasn't come down."
Why won't long-term rates come down?
The 10-year Treasury yield has climbed to its highest since 2007. Mortgage rates slid close to 6% in February, then rebounded past 7%. This means → on a $400,000 new mortgage, a household pays roughly $3,000 more per year.
Former World Bank president Robert Zoellick called Bessent's buyback of older bonds a "tactical tool" — what truly drives long-term rates is deficit spending and tariff policy.
This reflects a market repricing of three things — how much the U.S. will need to borrow, how high inflation could run, and whether the fiscal path is sustainable — and a demand for higher yields to compensate.
Tariffs, immigration, energy — where is the inflation coming from?
Tariffs raise import costs; firms may pass part of those costs on to consumers. Immigration curbs shrink the labor supply; with unemployment near 4%, that intensifies hiring pressure and wage growth, pushing up service costs.
Former Treasury adviser Joseph LaVorgna called diesel "the industrial economy": Middle East conflict is lifting oil and diesel prices, rippling through food, logistics and retail.
Brookings researcher Jessica Riedl argues that tax cuts, new spending, higher tariffs and pressure on the Fed to cut rates all point in one direction — more inflation. In plain terms = the White House is pressing several accelerators at once, and every one of them pushes prices higher.
What does the AI investment boom have to do with rates?
AI companies raising capital and the federal government issuing debt are competing for the same pool of money. This means → more borrowers chasing a finite supply of funds pushes rates up.
AI investment itself is not the problem, but when it expands alongside a high fiscal deficit, the high-rate environment may last longer than it otherwise would.
The housing market already shows the strain: mortgage rates around 7% erode buying power, while homeowners locked into low-rate loans have little incentive to sell — further restricting supply. This reflects high rates squeezing ordinary households through two channels: "can't afford to buy" and "no reason to sell."
If the economy weakens, how much policy room is left?
If deficits, tariffs, a shrinking labor force and rising energy prices persist, the U.S. will have less room to respond when the next downturn arrives.
In plain terms = once the economy softens, falling tax revenue and rising social spending would widen the deficit again — yet long-term rates may not fall as sharply as they have in past cycles. The old playbook of "borrow your way out" may be running out of road.
Richmond Fed president Tom Barkin says the Fed would need to act if inflation persists; but other economists counter that rate hikes cannot directly fix supply-side problems like diesel prices — monetary policy is being handed a problem it was not designed to solve.
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