Trump's economic policies were supposed to lead to cheaper oil, lower interest rates, and smaller deficits, while pushing growth and investment to stronger levels. But about two years after his return to the White House, the numbers appear more complex: Brent crude oil exceeded $100 per barrel, and the Federal Reserve raised interest rates again, while the budget deficit remained close to 6 percent of GDP.
The war in the Middle East was not alone behind this transformation. The energy shock was intertwined with strong domestic demand, continued government borrowing and high financing costs, in addition to the repercussions of customs duties, restrictions on immigration, and accelerated investment in artificial intelligence.
Thus, goals that seemed compatible at the beginning of Trump's second term have become more difficult to achieve simultaneously: strong growth, cheaper energy, lower inflation, lower borrowing costs, and smaller deficits.
Cheaper oil collides with a turbulent global market
Reducing energy costs was one of the main pillars of Trump's economic vision, while relying on increased American oil and gas production to support supply and reduce fuel costs for consumers and companies.
But the price of oil that matters to the American economy is not determined within the United States. With the expansion of the war in the Middle East and the disruption of supply routes, Brent crude jumped to $107.81 per barrel on September 14, in one of the most prominent waves of rising prices since the beginning of the war. Targeting oil facilities, transportation lines, and shipping routes also increased the cost of transporting crude and fuel.
This reveals the limits of betting on increasing local production. The United States can increase its production, but American companies and consumers remain tied to a global oil market, and its prices are affected by supplies coming from the Middle East and the safety of international trade routes.
Also, the rise in the price of crude oil does not remain limited to gas stations. The cost of energy is included in transportation, production, and services, which raises the possibility that the shock will be transmitted to broader prices, especially when domestic demand is strong.
Lower interest rates become hostage to inflation
The second goal was to reduce the cost of borrowing, whether for families that finance the purchase of homes and cars, or for companies that expand their investments and the government that finances its deficit.
But in September, the Federal Reserve took the opposite direction to this bet, when it raised the base interest rate range by a quarter of a percentage point to 3.75-4 percent, indicating that inflation was still high, despite describing economic activity as expanding at a solid pace, and domestic spending as resilient.
The matter did not stop there, as bank officials’ expectations showed that 16 out of 18 officials expected at least one additional increase before the end of the year, while market bets rose on a new increase at the October meeting, amid the continued rise in energy prices and strong economic data.
These expectations were strengthened after the statements of a number of Federal Reserve officials. New York Federal Reserve Bank President John Williams said that expecting another hike before the end of the year seems reasonable, while market traders are increasingly betting on a new tightening at the October meeting.
The robustness of the activity complicates the path of interest
What is noteworthy is that the strength of economic activity itself has become a factor that complicates the path of interest. The Federal Reserve's latest forecast showed real growth at 2.3 percent in 2026, with an unemployment rate at 4.1 percent, while committee members expect inflation according to the personal consumption expenditures index at 3.7 percent this year, much higher than the bank's target of 2 percent.
The picture becomes more complex as supply shocks overlap with domestic demand. The head of the Federal Reserve in Chicago, Austin Goolsbee, said that inflation has become affected by strong demand in addition to previous shocks such as customs duties and oil prices, noting that strong investment in artificial intelligence represents one of the sources of this demand.
Here the Fed's task becomes complicated: continuing activity at consistent levels does not require a rapid rate cut, while rising energy prices threaten to keep inflation high for a longer period. In contrast, rapid monetary easing may support demand at a time when energy costs are rising, making it more difficult to bring inflation back to target.
The deficit... a structural problem
The third goal, which is to reduce the deficit, faces a more structural problem.
The Federal Deficit, as expected by the Congressional Budget Office, reached $1.9 trillion in fiscal year 2026, equivalent to 5.8 percent of GDP. This is clearly greater than the average deficit of 3.8 percent of output over the past half century.
This places public finances far from one of the goals of the “3-3-3” plan proposed by Treasury Secretary Scott Besent, which is based on reducing the budget deficit to 3 percent of gross domestic product, achieving economic growth of 3 percent, and increasing domestic energy production by about 3 million barrels per day.
The problem is that economic expansion alone is not necessarily enough to reduce a gap of this size. As government spending rises and outstanding liabilities remain, the cost of servicing debt becomes an increasingly important factor, especially when interest rates and long-term yields remain high.
The Congressional Budget Office estimates that the federal debt held by the public will reach 101 percent of output in 2026, before rising to 120 percent in 2036, according to its basic projections.
Thus, the equation linking stronger activity to smaller deficits requires more than economic expansion. It also requires controlling spending growth, containing the cost of debt service, and increasing revenues or reducing expenditures enough to change the course of the deficit.
The bond market is testing the other side of the equation
Here another element appears that cannot be ignored: the cost of government borrowing is not determined by the Fed alone.
Long-term returns are affected by inflation expectations, the volume of government issuances, demand for Treasury bonds, and growth expectations, in addition to the path of short-term interest rates.
Therefore, short-term interest rate cut expectations may decline, while long-term yields remain high due to concerns about inflation or the amount of government borrowing.
US Treasury bond yields rose strongly during September before declining later as oil price movements and investor expectations changed. On September 10, the ten-year bond yield was about 4.77 percent, while the 30-year bond yield was 5.25 percent, according to Federal Reserve data.
This is important for the policy goal of lowering the cost of borrowing, because a decline in the policy interest rate does not automatically guarantee a lower cost of long-term financing for the government or for households and firms.
Artificial intelligence: a boost to investment and pressure on demand
On the other hand, there is one side of the equation that is moving in the direction that the administration was betting on: investment.
The boom in artificial intelligence has prompted companies to increase spending on chips, data centers, electrical equipment and infrastructure, and has contributed to keeping capital investment strong. In its last meeting, the Federal Reserve described capital investment as strong, and productivity as growing strongly.
But the investment boom carries another paradox. They support productivity and growth in the long term, but in the short term they increase demand for energy, equipment, labor and capital.
This makes the AI boom part of the monetary trade-off as well: it enhances future production capacity, but at the same time it adds to current demand in an economy where inflation is still higher than the Fed’s target.
From “cheaper oil” to managing trade-offs
But figures through September 2026 reveal that achieving these goals simultaneously is becoming more difficult. The economy is still cohesive, and investment is strong, but inflation has not returned to the Fed’s target, while the cost of borrowing has risen and the deficit remains high.
The force that supports investment and economic activity at the same time keeps demand strong, which makes cutting rates more difficult in light of high inflation. In public finances, higher interest rates increase the cost of servicing debt, making deficit reduction more complex.
Here lies the paradox that has emerged over the past two years: what supports one economic policy goal may make achieving another goal more difficult. Maintaining strong activity does not necessarily mean lower interest rates, and increasing borrowing to finance spending does not fit easily into the goal of deficit reduction when the cost of debt is high.
Thus, the challenge for Trump's economic equation has become more specific: How can we combine cheaper energy, less expensive borrowing, and a smaller deficit, without the pursuit of one of these goals weakening the chances of achieving the other?
