“U.S. interest rates have only one direction to go: up.”
Barry Eichengreen, professor of economics at the University of California, Berkeley (UC Berkeley), said the U.S. economy is set for a shake-up under the Trump administration in a recent email interview with the Chosun Daily. Professor Eichengreen predicted that the United States will not be able to avoid inflation after U.S. President-elect Donald Trump implements his proposed tariff plans on allies and adversaries. Trump’s other policies are also expected to increase U.S. national debt, adding inflationary pressures.
“Interest rates have bottomed out, and the only way it’s heading is up,” Eichengreen said. His view contrasts with the Federal Reserve’s projection of two rate cuts this year. “Trump considers nations that do not take decisive measures are weak,” and urged countries like South Korea to proactively address Trump’s tariff plans.
Eichengreen was a Senior Policy Advisor at the International Monetary Fund during the Asian Financial Crisis in 1997-1998 and served as an international advisor for the Bank of Korea Economic Research Institute for over a decade from 2007. He is known for his studies on South Korea’s economic miracle.
Regarding the country’s impeachment crisis, he said, “The younger generation’s strong desire for democracy will help the country overcome its challenges.”
What economic changes do you expect under Trump’s second term?
“Massive fiscal deficits and deregulation. While Trump proposes tax cuts, his other policies will require more government spending, inflating fiscal deficits. He proposed creating the Department of Government Efficiency (DOGE) to cut spending, but I doubt it will succeed. The Trump administration is expected to ease regulations, particularly in financial markets. But the timing is crucial because deregulation can fuel dynamism during good times, but backfire under adverse conditions. I’m not optimistic that Trump’s deregulation will yield positive outcomes.”
What lies ahead for the U.S. economy?
“I’m deeply concerned. Investors don’t respond well to uncertainty, and Trump is highly unpredictable. Take tariffs as an example. Retaliatory tariffs from countries like China will drive up production costs in the U.S., leading to higher consumer prices. The automotive industry is a prime case. U.S. automakers have historically worked well with partners like Canada and Mexico, but if tariffs push up steel and aluminum prices, car prices will rise, and consumers will bear the burden. On top of that, any amendments Trump makes to the CHIPS Act or the Inflation Reduction Act could harm green tech and high-tech industries.”
How should countries respond to Trump’s tariff plans?
“Countries like South Korea and China shouldn’t just sit back. Trump might interpret a lack of response as weakness. However, overreacting could provoke him further, so a balanced approach is essential. During Trump’s first term, South Korea and China managed to strike this balance relatively well.”
Last month, the Fed lowered its benchmark interest rate by 0.25 percentage points to 4.25–4.5%. The Fed’s projections show that rates would drop to 3.9% by the end of this year, 3.4% by the end of 2026, and 3.1% by the end of 2027. However, Eichengreen offered a different perspective.
What is your outlook on U.S. interest rates?
“It wouldn’t be surprising if the Fed’s December rate cut was its last [for now.] With Trump’s policies expected to lead to tariffs and massive fiscal deficits, inflation is unavoidable. Interest rates have bottomed out and will start to rise. There is only one direction they’re headed—up.”
But the U.S. economy is thriving, unlike the rest of the world.
“The U.S. has a strong edge in artificial intelligence (AI) and other advanced technologies. The Biden administration also kept the economy running strong by stimulating demand. Meanwhile, countries like China, Germany, and France face challenges, such as real estate bubbles, declining productivity, and rising public debt. They need to get their act together and come up with effective solutions.”
South Korea is grappling with a political crisis. Growth forecasts suggest the country’s GDP growth may drop to the 1% range.
“South Korea’s demographic structure is unfavorable, with low birth rates and a rapidly aging population. While national debt is relatively low compared to other advanced countries, rising healthcare and pension expenditures due to an aging population could strain public finances. Nevertheless, I believe South Korea can overcome its current political uncertainty.”
Cryptocurrencies like Bitcoin continue to rally. What’s your take on this?
“Cryptocurrencies are a fool’s game. The bubble will burst sooner or later.”