Senior central bank reporter: In order to win the election, Trump used

# Source: Wall Street Insights

## By Dong Jing

According to reports, Donald Trump has unprecedentedly activated three major stimulus levers simultaneously—fiscal, monetary, and credit policies: injecting $200 billion in tax relief, relaxing banking regulations to boost lending, and pressuring the Federal Reserve to slash interest rates aggressively. Analysts expect these measures to lift the first-half economic growth rate by 0.5 percentage points. However, the costs include spiraling debt, accumulated financial risks, and erosion of central bank independence, which may trigger a future debt crisis and market crash, with the consequences to unfold over time.

Trump is taking unprecedented steps to put the U.S. economy into "full gear," and he is highly likely to succeed this year.

On January 14, Greg Ip, senior journalist at *The Wall Street Journal*, wrote that the three levers Washington uses to control economic growth—fiscal, monetary, and credit policies—have never been aligned in history, but all have shifted toward stimulus this year. This reflects the focus of Trump and congressional Republicans on accelerating economic growth, with the goal of winning the midterm elections in November.

According to Greg Ip's analysis, on the fiscal front, the tax bill signed by Trump in July is pumping nearly $200 billion in stimulus into the economy; in the credit sector, regulators are easing bank capital requirements and lowering merger thresholds; on the monetary policy front, Trump is taking extreme measures to try to control the Federal Reserve, demanding that the next Fed chair implement sharp interest rate cuts. Analysts estimate these measures are sufficient to lift the first-half economic growth rate by up to 0.5 percentage points.

The article also points out that this strategy is being pursued at the expense of other goals: debt control, Federal Reserve independence, and long-term financial stability. Mounting debt will impoverish future generations and potentially trigger a debt crisis; relaxed credit supervision could lead to a market crash; and when central banks subordinate themselves to presidential goals, the outcomes usually end badly. Nevertheless, these consequences will manifest in the future. This year, investors are facing a rare scenario of coordinated policy stimulus.

### Fiscal Policy U-Turn: From Austerity to a $200 Billion Injection

The article notes that the U.S. economy performed strongly in 2025, with real GDP growing by approximately 2.5%, maintaining the solid momentum of the previous two years. The main drivers were investments in artificial intelligence and data centers, as well as robust consumer spending boosted by a strong stock market.

Notably, this performance was achieved against the backdrop of tight fiscal policy—Trump's tariff policies raised about $200 billion, most of which was borne by U.S. businesses and households.

This year's situation is starkly different. The average tariff rate will not rise; if the Supreme Court rules some tariff impositions illegal, rates may even decline.

At the same time, the tax and spending bill signed by Trump in July provides new or expanded tax deductions, particularly for state and local taxes, overtime pay, tips, and senior citizens.

Although these tax cuts are retroactive to the start of 2025, withholding tax tables were only adjusted at the beginning of this year. Donald Schneider, policy analyst at Piper Sandler, points out that this will generate a double stimulus effect: many workers will see higher take-home pay this month and receive tax refunds for last year when filing their returns.

He expects this to inject nearly $200 billion into the economy, enough to lift the annualized growth rate in the first half by up to 0.5 percentage points. Provisions in the bill allowing businesses to fully expense capital expenditures will also drive stronger investment.

### Credit Floodgates Opened: From Stringent Regulation to Relaxed Restrictions

The article states that the government's influence on risk appetite operates both psychologically and rationally. Loose regulation once allowed subprime mortgages to fuel the housing bubble of the early 2000s.

After the financial crisis, new rules required banks to hold more capital to cover loan losses and maintain cash reserves to meet fund outflows, limiting their lending capacity.

Since Trump took office, regulators have begun rolling back these restrictions. A set of rules was relaxed last year, enabling large banks to hold more U.S. Treasury bonds. Capital requirements are set to be eased, barriers to bank mergers are being lowered, and enforcement of consumer finance laws has been scaled back. All these measures will stimulate lending.

Trump has just ordered Fannie Mae and Freddie Mac to purchase $200 billion in mortgage-backed securities. These quasi-private companies guarantee trillions of dollars in residential mortgages; they suffered massive losses during the housing bubble burst and were placed under Treasury conservatorship in 2008.

UBS estimates this move could lower mortgage rates by 0.1 to 0.25 percentage points, boosting homebuying demand.

### Federal Reserve Shift: From "Neutral" to "Stimulative"

According to the *Wall Street Journal* article, former Federal Reserve Chair William McChesney Martin famously said that the Fed's job is to take away the punch bowl just as the party gets going—in other words, when economic growth is strong and financial speculation runs rampant, the Fed raises interest rates to curb inflation.

Trump detests this approach. He believes the Fed chair should cooperate with, rather than oppose, his other economic policies. "The person I want is someone who can lower interest rates when the market is doing well, because our country is getting stronger," he said on Tuesday.

To this end, Trump is taking extreme measures to try to control the Federal Reserve. He attempted to fire a Fed governor on the grounds of alleged mortgage misstatements and is now allowing the Justice Department to launch a criminal investigation into Fed Chair Jerome Powell over the cost of renovating the Fed's headquarters.

Fed officials currently expect to cut interest rates by 0.25 percentage points this year from the current range of 3.5% to 3.75%, bringing rates roughly to a "neutral" level that neither restricts nor stimulates growth.

But Trump does not want neutrality—he wants stimulative policies and is insistent that the next Fed chair implement sharp rate cuts. Both of his leading candidates—White House economic advisor Kevin Hassett and former Fed governor Kevin Warsh—have shown dovish tendencies.

While they may not cut rates to 1% as Trump desires, market expectations suggest that amid favorable inflation news (fading tariff impacts, falling oil prices, slowing housing inflation) and moderate labor cost growth, the new Fed leadership will have grounds to pursue more aggressive easing.

### Long-Term Costs Deferred

The article concludes with an analysis that the short-term impact of fully opening the fiscal, monetary, and credit floodgates is clear: the economy will see rapid growth. However, this strategy has been rare in history because it comes with heavy long-term consequences.

The current policy path does not slow debt growth; on the contrary, it may push the debt-to-GDP ratio above 100%, impoverishing future generations and triggering the risk of a debt crisis.

Relaxing credit and regulatory constraints against a backdrop of already elevated valuations could ultimately lead to a market crash.

Furthermore, forcing central banks to subordinate themselves to presidential political goals usually ends poorly.

The article points out that nonetheless, as the Fed shifts toward easing, bond market "vigilantes" are unlikely to punish budget deficits this year, and a market crash will not happen immediately. This year's dominant theme will be policy-driven prosperity, with the reckoning to come later.

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