Chief Global Strategist
While higher tariffs and lower immigration could boost inflation, they could also slow economic growth and add to uncertainty. This is also the case for cutbacks in federal government jobs, any delays in the normal processing of federal grants and loans, and an uncertain prospect of tax breaks in 2026. Uncertainty about all of this could also delay any further Federal Reserve rate cuts.
In brief
In the four weeks since taking office, U.S. President Trump has issued an extraordinary number of executive orders, while promising dramatic change across the full reach of the U.S. federal government. While these policy moves have broad political, geopolitical and social implications for investors, the most important concern tariffs, immigration, the federal workforce and the federal budget.
The rapid pace of these moves, along with frequent reversals, court challenges and mixed signals on future policy actions, make it difficult for economists to assess their cumulative effects. Also important, and even harder to analyze, is the potential for policy uncertainty to delay business decisions. Much has been said about the potential for the new administration’s policies to add to inflation pressures. However, investors should also consider how these actions and the uncertainty surrounding them could slow economic growth.
Tariffs
Since assuming office, the U.S. president has made some dramatic moves on trade. As of Monday, 17th February, the U.S. has imposed an additional 10% tariff on all imported Chinese goods and a broader 25% tariff on import of steel and aluminum. The U.S. President has also imposed, and then postponed for 30 days, tariffs on Canada and Mexico, and has announced his intention to impose reciprocal tariffs (after a review process) on markets that tax imports from the U.S. He has further announced his intention to impose tariffs on European car imports at the start of April and vowed to impose additional tariffs on the exports of any market imposing retaliatory tariffs on the U.S.
Some have argued that these moves are merely negotiating tactics, designed to squeeze concessions from the trading partners of the U.S. However, the U.S. President has made it clear that he regards tariff hikes as a major funding source for tax cuts elsewhere. If so, the trade endgame probably will not be a reversion to tariff rates as they were at the start of the year. Crucially, for businesses with significant exports or imports, it will be hard to make investment or hiring decisions until this endgame is clear. This, on its own, could impose a significant drag on U.S. growth.
Immigration
The new administration has been actively implementing its immigration policy, which includes several significant measures. These measures involve executive orders affecting the admission of asylum-seekers at the southern border, increased military presence at the border, and discussions with Mexico and Canada regarding border security. Additionally, there have been changes in the housing of migrants and enforcement actions targeting unauthorized immigrants with criminal records.
Initial reports indicate that deportations are currently below 1,000 per day, which is less than the target set during the campaign1. However, this rate may increase if Congress approves additional funding for Immigration and Customs Enforcement (ICE) and the administration broadens its focus to include unauthorized immigrants in the workplace, beyond those with criminal records..
Moreover, the crackdown may already be having more dramatic impacts on net migration by discouraging immigration. Official data show migrant encounters at the southern border fell from 260,000 per month in the fourth quarter of 2023 to 100,000 per month in the fourth quarter of 2024. According to leaked data from Customs and Border Protection, they may have fallen further to 30,000 in January and a running rate of less than 15,000 in February2. Traditional immigrant visas, issued at foreign embassies, rose to 670,000 in 2024 from 590,000 in 2023. However, they could fall sharply in 2025 due to a chilling effect of the administration’s immigration stance or the slow processing of visa applications, both due to enhanced vetting and federal government downsizing.
All of this is important for labor supply. According to the Census Bureau, the U.S. population grew by 3.3 million or 1.0% in the year ended in June 2024, almost entirely due to the net immigration of 2.8 million people. These numbers are likely to be far lower going forward, and since roughly 70% of immigrants are between the ages of 18 and 64, compared to 60% for the overall population, an immigration slowdown would likely have a disproportionately large impact on labor supply.
Indeed, because of the ageing of the baby boom, the latest Census Bureau projections show that with zero immigration, the population aged 18-64 would fall by an average of more than 800,000 people per year over the next five years. Net immigration is still likely to be positive going forward. However, policies that proved to be very successful in achieving mass deportations and discouraging immigration could result in a significant tightening of U.S. labor markets. This would boost wages and add to inflation pressures but would also slow job and profit growth and reduce demand growth for housing and consumer goods and services.
Cutting the Federal workforce
A third issue with the potential to impact the pace of economic growth is an aggressive downsizing of the federal workforce. In January, around two million federal workers received a buyout offer, and according to the White House, 77,000 accepted it. These employees will be classified as “on paid leave” until September, so they will still be counted as employed in both the household and establishment surveys. However, they will not be required to work and will be free to find other jobs.
Once the buyout period ended last Wednesday, thousands of other federal employees received termination letters. The layoffs were focused on the roughly 220,000 federal workers who were hired within the last year and who, consequently, are classified as probationary and thus lack normal federal employee worker protections. The Office of Personnel Management has declined to say how many people in total were laid off. However, they will be recorded as employed during the survey week for the February jobs report, but not in the March report, due to release in early April.
In addition to layoffs, the federal workforce will of course see further attrition due to retirements. Meanwhile, new hiring will be impeded by a current hiring freeze, an end to work-from-home options and a general fear among prospective employees about job security and conditions in federal government jobs.
We will know more with the release of the March jobs report. However, overall, it now seems quite possible that civilian federal government employment will be 200,000 jobs lower at the end of 2025 than at its start.
For context, in January, total federal government civilian employment amounted to just over 3 million workers, and contrary to popular opinion, has not been rising quickly in recent years. Over the last four years, as the economy recovered from the pandemic, federal government employment rose by 5% compared to an 11% increase in overall payroll employment. Over the past 20 years, federal government jobs have grown by 11%, compared to a 20% overall gain in non-farm payrolls.
Because of this, many departments likely regard themselves as understaffed already and the volume of layoffs and quits will likely slow many of the functions of the federal government, ultimately impacting both private businesses and U.S. citizens. This is particularly the case given the freeze on the distribution of loans and grants by the federal government initiated, although by court order suspended, at the start of the new administration.
The budget and taxes: one bill or two?
Finally, there is uncertainty concerning the budget. In the next few weeks, Congress needs to pass legislation to keep the government open beyond March 14th. In addition, it will have to raise, suspend or eliminate the debt ceiling that was reimposed on January 1st of this year. Because of a buildup of cash on hand by the Treasury and the use of extraordinary measures, action on the debt ceiling could be postponed to early June, or perhaps, on a close call, August3. However, beyond that, the government would default on its obligations, with potentially catastrophic implications for both the economy and global financial markets.
Beyond these issues, there is another deadline to consider.
At the end of 2025, without congressional action, most of the tax cuts from the 2017 Tax Cuts and Jobs Act will expire. In addition, the U.S. President made many campaign promises, including a commitment to eliminate taxes on tips, overtime and social security, to cut the corporate income tax rate from 21% to 15% and to allow for the full expensing of corporate equipment and R&D spending for domestic production, to allow new vehicle buyers to deduct their interest expenses and to restore the deductibility of state and local taxes.
All of this could, in theory, be achieved with Republican votes alone, if it is packaged as part of an omnibus reconciliation bill for the federal budget and is thus immune, by Senate rules, from a filibuster (which takes 60 Senate votes to break). Since the reconciliation bill for the fiscal 2025 budget has still not been passed (even though the fiscal year began more than four months ago), Republicans have two bites of the apple to pass major budgetary legislation this year – the fiscal 2025 reconciliation bill and the 2026 reconciliation bill.
The White House and the House Speaker favor a “one-bill” approach which addresses all of these issues, as well as extra funding for border security, in a bill passed this spring. The House Budget Committee took a first step down this road last week by approving a budget resolution allowing for USD 3.3trillion in new borrowing over the next ten years4. This proposal includes tax cuts of USD 4.5trillion and USD 1.5trillion in spending cuts, along with a USD 4trillion increase in the debt ceiling.
The Senate, conversely, is adopting a “two-bill” approach, with just a USD 517billion increase in borrowing over the next ten years, designed mainly to fund greater spending on border security with the issue of tax cuts and how to fund them postponed until a second bill later this year.
Navigating U.S. politics can be challenging, but the two-bill approach appears to be a more probable path. House Speaker, Mike Johnson, will have his hands full trying to rustle up a majority, first, to keep the government open beyond March 14th and, second, to increase the debt ceiling. His most pressing problem is that, even assuming that Republicans win special elections to fill vacant seats, he will only have a three-seat majority in the House and any legislation could be blocked by just two Republican deficit hawks voting against it. It would presumably be easier to get all Republicans to support a smaller bill that was paid for or had only minor deficit implications.
However, if he adopts this approach, negotiations on all the tax cuts would get delayed into the summer and fall. The eventual tax bill, should it pass, would likely be stimulative to the economy in 2026. However, like all of these other issues, there would be considerable uncertainty about the nature of tax cuts throughout most of this year, potentially causing businesses to postpone major investment or hiring decisions until they have greater clarity.
Investment implications
For the economy, there is a broad theme in all of this.
While higher tariffs and lower immigration could boost inflation, they could also slow economic growth and add to uncertainty. This is also the case for cutbacks in federal government jobs, any delays in the normal processing of federal grants and loans and an uncertain prospect of tax breaks in 2026. Uncertainty about all of this could also delay any further Federal Reserve rate cuts.
Some of this uncertainty will be resolved in the months to come and fiscal stimulus in 2026 could add to economic growth before the mid-term elections. However, in the meantime, investors should consider not just the upside to inflation but also the potential downside to economic growth from a tidal wave of new Washington policies.