It is dangerous to assume that all decisions of the new U.S. administration are uncoordinated and driven solely by hostility toward Democrats and the previous administration. Perhaps there is some method in at least some of its madness.
Donald Trump has made sure that Americans, financial markets, and the entire world notice his return to the White House. Constantly changing tariffs, antagonizing close allies, a record number of executive orders issued in the first month of his presidency, and the actions of Elon Musk, who has been firing and rehiring waves of government employees, have made headlines not only in the media but also in financial markets.
Since Donald Trump’s inauguration, the U.S. dollar, stock market, and long-term interest rates have recorded significant declines. Initially, investors feared tariffs, immigration restrictions, and government spending cuts, but these concerns quickly turned into fears of a recession driven by uncertainty about the economic and regulatory environment.
At first glance, the Trump administration inherited the U.S. economy in excellent shape. Economic growth was above the long-term trend, the labor market was at full employment, and inflation was returning to normal. The Biden administration paid a high price to maintain these parameters through the election year. A deficit exceeding 6% of GDP in 2023 and 2024, resulting from the continuation of pandemic-era programs, student debt forgiveness, expanded public healthcare, and the rising cost of servicing debt due to higher interest rates, contributed to increasing national debt. The weakening private sector also required support – a significant portion of new jobs created in 2023 and 2024 came from government, state, and public healthcare initiatives.
In one of his recent public statements, Donald Trump said: “This is artificial growth, these are artificial jobs.” This is likely not just his personal opinion but a core belief of his administration, likely stemming from Scott Bessent. The former hedge fund manager appears to be a key figure in shaping Trump’s economic policy. Although he likely disagrees with many of the administration’s decisions, the overall policy direction aligns with his vision. Bessent himself noted in an interview that the next six months are still not the “Trump economy,” preparing the public for tougher times. In another statement, he suggested that the current policies (i.e., excessive spending and overemployment in the public sector) could continue for a year or two before their natural collapse.
Objectively speaking, the situation is challenging – a slow decline in macroeconomic indicators was visible throughout 2024. Entering a recession with a 6% deficit and inflation lower than a year or two ago but still persistently above the central bank’s target would be a challenge. Given the current debt levels and the impact of automatic stabilizers, there is no room for fiscal stimulus, and inflation limits monetary stimulus.
Donald Trump knows how to win elections and is highly concerned about his public perception. A weak economy is a direct path to failure in both respects. If a recession in the next four years is inevitable, he may prefer to go through it now, giving Republicans a chance to win again in four years when the economy is back on a growth path, leaving a better impression.
If this is the goal, the Trump administration needs low interest rates, low inflation, and pro-growth structural reforms to lay the foundation for the next cycle. In recent years, the Treasury Department has financed government spending with short-term bonds. As a result, in 2025 alone, about $9 trillion must be refinanced, along with an additional $2 trillion to cover the deficit. In total, during this term, $17 trillion of existing debt must be refinanced – 60% of the total.
Issuing long-term bonds at low interest rates would not only improve the debt structure but also be the most crucial part of addressing the deficit, where in 2024, 61% was interest payments. The actions of the Treasury Department and Elon Musk aim to convince markets that this is the first administration since Bill Clinton’s that recognizes the public debt problem. Establishing this belief could be particularly crucial when, during an economic slowdown, the deficit increases instead of decreasing.
Public sector layoffs, dampening market sentiment through open communication about the upcoming slowdown, and announcements of increased oil and gas production ensure that when the economy actually slows, inflation will not hinder the Fed from implementing monetary stimulus, which will be the only option given the high deficit. Expelling illegal workers could, in turn, open job opportunities and mitigate the impact of the economic slowdown or improve public perception if deportations remain only rhetorical.
Over the past two weeks, markets have started pricing in this scenario. Long-term interest rates initially declined following the Treasury Department’s spending cut announcements, then continued falling by 0.5 percentage points from pre-inauguration levels in anticipation of weaker economic conditions and faster rate cuts by the Fed. Commodity markets also reacted in line with the Trump administration’s preferences – the price of oil dropped to $65 per barrel, the lowest since 2021. U.S. stock prices also declined, with the most cyclical companies experiencing the largest losses, suggesting that investors have revised down their growth expectations. As Donald Trump has repeatedly emphasized, he no longer watches stock prices as he did during his first term. Now, he focuses on 10-year bond yields, and markets are beginning to believe it.
However, this does not mean that the Trump administration is playing multi-dimensional chess and that every move is a meticulously planned step toward a predetermined goal. The tariff confusion, according to White House leaks, contradicts the opinion of the vast majority of advisors – only the president and Commerce Secretary Howard Lutnick (who secured his position by raising the most campaign funds for Trump) advocate for tariffs, yet they are being implemented.
For positioning in the markets or predicting future political moves, it is dangerous to assume that all decisions of this administration are uncoordinated and motivated solely by hostility toward Democrats and the previous administration. Perhaps there is some method in at least some of its madness.
Author: Grzegorz Parosa
The author is a Partner at the hedge fund Redwood Grove Capital, based in Palo Alto, California, holds a Ph.D. in social sciences in the field of economics and finance, and is a member of the Polish Economic Society.
