Trump's plans for deportations, tariffs and the Fed will jack up inflation, economists say

By Victor Reklaitis

Employment would rise at first but then drop and remain lower, according to a new paper

Three signature proposals from Republican presidential nominee Donald Trump - increasing tariffs, curbing the Federal Reserve's independence and cracking down on illegal immigration through deportations - would hurt the U.S. economy overall, according to a new paper from economists at the Peterson Institute for International Economics, a nonpartisan think tank.

While Trump says his administration is "going to make foreigners pay, unfortunately, under these policies, it's U.S. consumers, workers and firms that will end up paying," said Warwick McKibbin, a nonresident senior fellow at the Peterson Institute, as he and his colleagues presented their findings at an event hosted by the institute today.

The institute said its economists analyzed the three Trump proposals because of their potentially significant economic implications. The paper features estimates for a "low scenario" and a "high scenario," as shown in the chart above.

In the low scenario, tariffs are increased by 10% for all U.S. imports and by 60% for imports from China, but foreign countries don't retaliate; 1.3 million undocumented immigrant workers are deported; and the Fed's independence is eroded. In the high scenario, the same tariff increases are enacted and other countries do retaliate, while 8.3 million people are deported and the U.S. central bank's independence is eroded.

The low scenario would have the effect of increasing the U.S. inflation rate by an additional 4.1 percentage points by 2026, while the high scenario would increase it by an additional 7.4 percentage points, according to the paper.

The country's real gross domestic product would be between 2.8% and 9.7% lower than baseline by the end of Trump's four-year term in 2028, the institute's economists found.

Employment, measured via hours worked, would rise at first but then drop and remain lower through 2040, as shown in the chart below.

Sectors such as manufacturing XLI and agriculture MOO would be hit in particular, according to the paper.

"If you do mainstream economics, not ideology, if you use data, not hand waving, the combination of mass deportations across the board, tariffs and eroded Fed independence is bad for the economy," said Adam Posen, president of the Peterson Institute.

"We - speaking as the institute, speaking as scholars - care about policies, not candidates," Posen added. "Candidates can change policies. People can make candidates change policies. People can make even presidents change policies."

Trump's allies have pushed back on concerns that another term in office for the former president would be inflationary. Hedge-fund manager Scott Bessent - viewed as in the running to become Treasury secretary in a second Trump administration - told MarketWatch in July that it's "absurd" to think there would be a boost to inflation, as he predicted there would be disinflation from factors like deregulation and lower energy prices XLE.

Other economists besides those at the Peterson Institute have predicted another Trump term would add to inflation, including a majority of economists in a Wall Street Journal survey as well as prominent Democratic economist Larry Summers. Inflation has been a top issue throughout this year's White House race, driven by the fact that it reached a 40-year peak during the Biden-Harris administration.

The White House race is tight, according to polls in the swing states that are likely to decide November's election. As of Thursday, Democratic nominee Kamala Harris has been seen as slightly more likely to win by betting markets, according to a RealClearPolitics average.

Related: Trump and Biden play blame game on inflation. Here's what prices did under their watch.

-Victor Reklaitis

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09-26-24 1406ET

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