Trump’s economy looks set to be volatile.

The return of Donald Trump to the US Presidency in the New Year will almost certainly herald a new economic era, not only for the US but for the world. His populist movement is intended to curb globalization – free movement of people and trade. He has pledged high import tariffs, as high as 60% on Chinese goods, and the mass deportation of undocumented immigrants. There is uncertainty over extent to which he will implement these plans, and their impact if he does.

Many economists argue that Trump misunderstands the nature of the interconnected global economy and therefore misjudges the effect of tariffs. He tends to see bilateral trade as a zero-sum game, and understate, or fail to acknowledge, complexity and unexpected outcomes. The trade balance is determined by aggregate supply and demand and it is unlikely that high tariffs on Chinese imports would reduce the trading deficit. The most likely consequences are persistent deficits and rising inflation and unemployment.

Another feature is that many products have hundreds of parts, and many components of US goods originate in China, so tariffs could force prices of US goods upwards. Also, implementing a tariff regime is inherently bureaucratic, especially if ‘rules of origin’ measures are imposed to prevent Chinese imports being routed indirectly. Lastly, imposing tariffs runs the risk of trade wars.

Against that, some economists argue that proponents of globalized trade overstate the negative impact of tariffs, as corporations will find ways to re-route trade. Tariffs tend to be a slow, long-term drag on growth, so warning of a shock that doesn’t materialize can mean that economists’ analysis can lose credibility. Another consideration is that other features of Trump’s policies mitigate the effects, such as lower taxes and deregulation. A stronger dollar would inhibit inflation.

Trump’s declared plan to deport up to 12 million undocumented immigrants would likely be inflationary, however, as it would almost certainly lead to labor shortages, forcing wages upwards and increasing business costs.

He does, however, have a track record as President, and he was often less radical than he had promised to be – he did not construct a border wall, for example. It is possible that he will dilute his plans both on tariffs and on deportations.

Trump’s fiscal policy is expansionary. He is planning tax cuts without significant spending cuts. There are plans to improve government efficiency – but headed by Elon Musk, an individual with no experience in such a task and no experience in public sector management.

There are signs that the economy may be overheating. Equity markets, by standard valuations, have reached over-valued status. The value of Bitcoin has continued to soar, to nearly $100,000.

Then there is the dollar. The proportion of national debt to GDP is around 100%, with little prospect of it being reduced under the Trump administration. In the short term, the dollar is strengthening, but there are so many conflicting forces simultaneously that anticipating its path is harder to anticipate than usual.

The Federal Reserve will face a difficult balancing act on interest rate policy. Jerome Powell, in a speech on 14 November, gave a clear signal that interest rate cuts are on hold following the cut earlier in the month. ‘The economy is not sending any signals that we need to be in a hurry to lower rates,’ he said. The Fed sees the economy to be in balance, with unemployment and inflation both low. There is one more decision on interest rates this year, following the meeting of the Federal Open Market Committee on 17-18 December, and it is likely that the decision will be to hold interest rates at their current level.

President Trump has protested that Powell has displayed bias towards the Democrats, but there is little evidence to support this; there was only one interest rate reduction prior to the election, as the Democrats were defending the Presidency in the election, although it was of 50 basis points, in September. A second cut of 25 basis points came two days after the election.

Powell always insists that the decisions on interest rates are objective, and based on economic data. Trump’s policies, of course, will affect the data. Some measures will be inflationary, others disinflationary. Both his policy direction and the effects are likely to be volatile.