How has Trump's second-term economic policy affected inflation, employment, and markets?
Executive summary
President Trump’s second-term economic mix—big tariffs, tax cuts, deregulation and labour/immigration tightening—has produced a mixed set of outcomes: headline inflation remains above the Fed’s 2% goal but well below alarmist forecasts, job growth has slowed from 2024’s pace, and markets have oscillated between relief at tax-driven profit boosts and jitters over trade-driven uncertainty [1] [2] [3]. Economists and think tanks disagree sharply about the medium-term trajectory: some see durable inflationary pressures from tariffs and labour constraints, while others argue growth and corporate profits have so far cushioned the blow [4] [1] [5].
1. Policy architecture: tariffs, tax cuts and deregulation driving the environment
The administration’s signature moves—large, economy-wide tariffs layered on existing duties, a major tax-cut package (the One Big Beautiful Bill Act), and deregulatory steps—are the engine of observed outcomes: tariffs raised Treasury receipts and disrupted trade patterns, while tax cuts lifted disposable income and corporate profitability, creating offsetting forces on prices, output, and investor sentiment [2] [6] [1].
2. Inflation: cooler than worst-case models, but upward pressure remains
Measured inflation has not exploded to the extreme ranges some models predicted, with CPI/PCE running in the mid-2 percent range through late 2025, but independent forecasts and policy analyses warn that tariff-driven cost shocks and labour constraints could keep core inflation above the Fed’s 2% target and delay rate cuts; the Peterson Institute and Oxford/abrdn modelling both show material upside risk to inflation from tariffs and weaker labour supply even as headline figures have moderated [2] [4] [1] [7].
3. Employment: cooling hiring and squeezed real wages
The labour market has weakened relative to the pre-inauguration momentum—job additions fell substantially in 2025 versus 2024 and unemployment ticked higher, with multiple outlets reporting that monthly job growth slowed sharply and that policies constraining wages (including rollbacks for federal contractors) exacerbate affordability problems for low-wage households [3] [8] [9]. Proponents point to tax refunds and deregulation as potential accelerants for hiring, but independent reporting shows firms paused hiring amid tariff uncertainty and profitability-driven cost management [10] [2].
4. Markets: corporate profits buoy stocks even as policy uncertainty spooks investors
Equities have benefited from improved corporate profitability tied to tax cuts and a resilient consumer, but markets reacted violently at times to trade actions and policy volatility—tariff announcements and rapid shifts in effective rates drove sell-offs, hit small-cap benchmarks, and unnerved bond investors about future inflation and Fed policy, producing a mixed market picture where gains coexist with increased volatility and sectoral re-pricing [2] [6] [11] [12].
5. Competing narratives and the near-term outlook
Analysts split: some, including free‑market and centrist forecasters, credit deregulation and tax cuts with keeping growth resilient and argue tariffs’ inflationary effects have been muted so far [5] [13], while policy institutes and progressive economists warn that the combined policies could lift inflation materially and erode living standards over time—PIIE’s scenarios project substantially higher inflation in coming years if tariffs and fiscal loosening persist [4] [14]. The near-term path hinges on whether tariffs are sustained or litigated away, how the Fed responds to sticky core inflation, and whether firms translate higher profits into hiring and wage gains or into buybacks and investment; reporting so far shows evidence for both outcomes but no single definitive trajectory [12] [10] [15].