Stokes inflation concern

‘A little heartburn': Jobs blowout stokes inflation concern with Trump poised to return

The government reported another blowout jobs number, but the danger for Trump will be if the economy falters even slightly from the sky-high hopes that investors have for his administration.

President-elect Donald Trump speaks to the press.

By Sam Sutton and Victoria Guida

President-elect Donald Trump is about to inherit a robust domestic economy from President Joe Biden, presenting his second administration with a major political advantage that few incoming presidents are granted.

Now, it’s up to Trump to keep the good times rolling.

The Labor Department announced Friday that the economy blew past expectations and added a net 256,000 jobs in December while the unemployment rate — already low by historical standards — fell to 4.1 percent. Wages, which have grown 3.9 percent over the past year, are rising faster than inflation.

That positive jobs report will create an even wider avenue for Trump to take credit for an economy that many Wall Street investors and analysts expect to remain solid at least through the early days of his second presidency.

The danger for Trump will be if the economy’s performance falters even slightly from the sky-high hopes that investors have for his administration. There’s already evidence that the post-election euphoria that propelled the stock market to new heights has started to wane. The yields on 10-year Treasuries — a barometer for longer-term inflation expectations — rocketed this week as the president-elect doubled down on plans to slap tariffs on key allies.

“Markets are all about how conditions come in relative to expectations,” said Unlimited Funds CEO Bob Elliott. “One of the challenges that the new administration is facing from a markets perspective — and we know that they’re very focused on market outcomes — is that essentially all the possible good work that they could do has already been priced in before they’ve shown up.”

Trump has sought to keep the optimism going by using his bully pulpit at Mar-a-Lago, trotting out SoftBank CEO Masayoshi Son in December to pledge an investment of $100 billion that will go toward the creation of 100,000 jobs. DAMAC Properties of Dubai founder and chair Hussain Sajwani — who has partnered with the Trump Organization on golf courses in the Middle East — made a similar $20 billion commitment to invest in U.S. data centers earlier this week.

Yet he may soon have to grapple with similar economic forces that bedeviled Biden for much of his administration.

Trump repeatedly claimed that prices — and interest rates — would come down if he were elected back to the White House. But if the economy grows at a healthy clip and the labor market remains strong, it will weaken the Federal Reserve’s case for bringing down interest rates. That could draw the ire of Trump, who has loudly complained in the past that the Fed has stifled economic growth.

It has taken longer than expected for price growth to slow all the way to the Fed’s annual 2 percent target. Central bank policymakers have already downshifted plans to lower borrowing costs in 2025. Trump’s agenda — which some economists believe will be inflationary — could also slow their pace.

If that happens, Trump may soon have to reckon with rising bond yields and a jittery stock market.

“The equity market is starting to have a little heartburn” over the potential that Trump’s agenda may prove inflationary — rather than stimulative – which would force the Fed to keep borrowing costs elevated, Brendan Walsh, a principal at the research firm Markets Policy Partners, said. “The normal way that you would keep the good times rolling will push rates higher, which will crimp the ability for good times to roll.”

Friday’s jobs report is likely to stoke concern that inflation will remain untamed.

“The thought that inflation is going to come down is now very much in question,” former Fed Vice Chair Roger Ferguson said on CNBC after the release of the December numbers. The probability of two Fed rate cuts this year, which many investors had been expected, seems “very, very remote at this stage,” he said.

But rates might still end up lower than market analysts expect this year.

Samuel Tombs, chief U.S. economist at Pantheon Macro, pointed to signs that borrowing costs are still crimping growth, including that sectors more directly affected by rates are seeing weaker hiring.

He also pointed to policy uncertainty as one reason economic activity could slow.

“We think many large businesses will pause hiring until the new administration clarifies its economic policy intentions regarding immigration, tariffs, procurement and regulation,” he wrote in a note to clients.