Now that President Trump has taken office, investors are sharpening their focus on the administration’s proposed fiscal, immigration, regulatory, and trade policies. We shared our initial thoughts on likely shifts in policy in our Post-Election Economic and Market Outlook back in November. While it remains challenging to predict outcomes given razor-thin congressional margins, we offer this update (as of January 14) on the evolving policy landscape and its potential impact on both the real economy and the markets during 2025 and into 2026.

Legislative agenda

On January 4th, Speaker of the House Mike Johnson revealed that the first major legislative initiative of the 119th Congress would be “one big, beautiful bill” encompassing tax cuts, border security, energy deregulation, and an expansion of the debt ceiling.  He also suggested an aggressive goal of passing the legislation through the House by the first week of April so it could be signed into law by Memorial Day.

Despite its broad scope and aggressive timeline, the legislation – if passed – likely won’t have a material impact on the real economy in 2025 for three reasons:

1. most of the anticipated changes to the tax code won’t take effect until 2026;
2. the largest component of the tax package – the extension of the Tax Cuts and Jobs Act (TCJA) – doesn’t return money to taxpayers, it merely prevents taxes from rising as scheduled; and
3. marshalling the physical resources necessary to enforce immigration policy and to ramp up energy production simply takes time.

Trade policy

On the trade front, on January 6th, then President-elect Trump rejected a report from the Washington Post which said that his administration was considering a scaled-back approach to tariffs, and he reiterated his commitment to them during a speech at Mar-a-Lago the next day.  Unlike the legislative policy initiatives above, tariffs could influence the real economy during 2025 since they can be implemented more easily and have the potential to disrupt supply chains and trade flows.

If imposed, tariffs could have both positive and negative implications.  On the positive side, the Congressional Budget Office (CBO) suggests that “permanently increasing the existing rates of duty on imports from all countries by the equivalent of 10 percent of the value of goods”[1] reduce cumulative deficits by $2.2 trillion from 2025 to 3034.[2]  On the negative side, the same CBO analysis suggests that the tariffs could increase inflation, as measured by the level of the 2026 Personal Consumption Expenditures (PCE) price index, by roughly 0.6%² – with no further increase in PCE expected after 2026.

Cost-cutting

Finally, on January 8th, Elon Musk, the co-head of the Trump administration’s proposed Department of Government Efficiency (DOGE) initiative, scaled back his estimate of the cost savings that the task force might achieve.  After initially stating that DOGE would identify $2 trillion in cost savings by the United States’ 250th birthday on July 4, 2026, Musk suggested a more realistic goal is half that amount. From the perspective of the real economy in 2025, this reduced figure may be good news, since drastic, short-term reductions in government spending could have caused a significant economic slowdown. However, it also bodes poorly for the fiscal deficit.

If one accepts the analysis above, the primary impact of the Trump administration’s policy initiatives on the real economy in 2025 could be a modest rise in inflation.  The same can’t be said for 2026, however, since:

• corporate tax policies and tweaks to the TCJA have the potential to stimulate the economy and increase inflation and the deficit;
• immigration policies could reduce economic activity through reductions in the workforce while causing wage and inflation pressures; and
• regulatory changes could stimulate business activity.

The financial side of the economy may already have begun to reflect these possibilities.  In the credit markets, the yield on the 10-year Treasury has risen by 45 basis points since Election Day.  Approximately two-thirds of that increase is attributable to higher real yields, which may reflect greater uncertainty about the fiscal outlook in the United States.  Alternatively, in the equity markets, hope remains that corporate tax cuts and a more favorable regulatory environment will sustain private sector growth beyond 2025.

Given that additional details about the scale and scope of policy initiatives could change these baseline assumptions, we will continue to monitor the situation closely. Flexibility will be key as we navigate the continued uncertainties of the policy environment.

Related articles:

2025 Economic and Market Outlook

Key Investment Themes & Opportunities for 2025