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Written by: Matt Gentzkow | Waddell and Associates
THE BOTTOM LINE:
The second Trump Presidency kicked off last week, and there is now some proof to the pudding of what is to come from his second term. Trump has coined this the “Golden Age of America,” but threading that needle will be difficult for Trump’s administration. An interest rate battle looms large with Jerome Powell, and it impacts the interest expense of the federal debt load. Trump announced a collaborative AI investment initiative with industry leaders and called for an increase in defense spending but also a reduction in the corporate income tax. So far, he hasn’t levied the additional tariffs he threatened throughout his re-election campaign. It’s only week one, but there are enough breadcrumbs to begin to understand the economic impacts in the future.
We are one week into Trump’s second Presidency, and we can finally begin to separate the wheat from the chaff in terms of the administration’s words and actions. Trump joined the World Economic Forum’s annual meeting on Thursday last week and delivered a speech that dropped some breadcrumbs on what he did and did not action during the first week of his second term that will impact the economy. Trump said during both his inaugural address and his Thursday speech that we are entering the “Golden Age of America.” To do so, his administration will need to support economic growth but also manage the federal deficit and debt load. He needs to increase government revenues, decrease expenses, or, in the best possible outcome, both, but can he thread the needle and deliver on his “Golden Age of America” promise?
A Simple Yet Difficult Demand
It wasn’t the first thing mentioned during Thursday’s speech, but eventually, Trump quipped that he would “demand interest rates drop immediately after the price of oil comes down.” We can talk later about tariffs, but Trump understands that lowering interest rates is the only meaningful lever to reduce the government deficit (outside of raising taxes on the American people). The US Treasury publishes monthly statements—here’s a chart on the income (receipts) and expenses (outlays), of the US Treasury for fiscal year 2024:
Source: https://fiscaldata.treasury.gov/datasets/monthly-treasury-statement/summary-of-receipts-outlays-and-the-deficit-surplus-of-the-u-s-government
A deficit of over $1.8 trillion. For Trump to reduce the expense side of the budget, it’s very hard to find where the cuts are going to come from. Social security, Medicare, defense spending? Nope. The low-hanging fruit in Trump’s mind here is the net interest expense. Do you remember T-bill and chill? Yep, as interest rates rose in 2022-2023, so did the weighted average interest rate on US government debt. This year, the CBOE projects this line-item expense to be almost 1 trillion dollars (!). This is why Trump is so adamant that interest rates come down. He wants to increase defense spending to over $1.3 Trillion, and cuts to social security and Medicare are non-negotiable because he will need congressional support to lower the corporate tax rate, but more on that later.
Powell Vs. Trump
Trump had his ‘return to glory’ last week, but this week the focus will shift to Jerome Powell’s response to Trump’s demand on interest rates. The Fed will convene on January 28-29th, and with Trump’s demand for lower interest rates, it pits him squarely against Jerome Powell and the Fed, who actually hold the power of setting the target federal funds rate. Powell will surely not budge at the President’s call for lowering interest rates. Fighting Trump on interest rate policy could suit Powell’s fancy, thereby setting off a more hawkish Fed. This would put pressure on US equity valuations as long-term interest rates trudge higher under higher-for-longer Fed interest rate policy. Trump has long held an affinity for the stock market and thoroughly enjoys having US equities at all-time highs, and he even rang the bell at the NYSE just last month! However, a fight on interest rates and Fed policy will only intensify from here.
Finally, (No) Tariffs
Considering that the expense side of the federal budget will likely increase, let’s look at the income side of the ledger. Trump ran a re-election campaign on the back of tariffs, but so far, there’s been more bark than bite. During his speech at Davos last week, he mentioned his desire for trade with China only to be more equitable and not necessarily overtly in favor of the US. With a week gone by and no additional tariffs levied, it’s increasingly likely that tariffs will be more of a negotiating tactic.
This dovetails with Trump’s call for the US corporate tax-rate to be reduced to 15% from 21%. Trump understands he needs more economic activity to grow both the consumer and corporate tax base. By further lowering the corporate tax rate, Trump’s pitch to company executives is: make your product in the US, where you’ll pay a 15% corporate tax, or continue producing elsewhere and face increasing tariffs. But with no additional tariffs levied last week, it’s more of a negotiating tactic at this point. Trump will rely on companies bringing production facilities to the US, adding jobs and income, and increasing GDP while not passing on price increases to the US consumer through overbearing tariffs. The end game is likely a long and variable lag of increasing productivity and enough corporate onshoring to offset the decrease in the corporate tax rate through sheer volume and the incremental increase in individual tax receipts from the new jobs created.
This Generation’s Arm’s Race
Most interesting to investors, Trump announced the launch of the Stargate Initiative—a $500 billion private-sector collaboration targeting the expansion of the artificial intelligence infrastructure in the United States. Executives from OpenAI, Oracle, and other leading companies believe the investment will position the US to lead the race in artificial intelligence and quantum computing. The initiative initially will build ten data center facilities, each 500,000 square feet. These data centers and the energy that powers them are crucial to the expansion and acceleration of AI. Without the energy capacity to fulfill the ever-increasing demand for power, a limit is placed on how quickly we can accelerate AI’s growth. A single Chat-GPT search requires 10x the computing power of a simple Google search. You can see how the power demand exponentially grows as the usage increases. Enter the US Government. Trump facilitating the deal amidst a light-handed regulatory environment allows for the energy sector expansion needed to power the arms race, bringing some private sector jobs along with it to construct and manage the data centers.
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Sources: https://www.forbes.com/sites/garthfriesen/2025/01/23/trumps-ai-push-understanding-the-500-billion-stargate-initiative/ and Davos 2025 speech: https://www.youtube.com/watch?v=A-DSB13ZWtg