Inflation and deficits define new economic battle for Congress and Trump

Voters have demanded economic repair from the new Democratic majority in Congress and President Donald Trump. The central conflict now involves controlling inflation, which has remained elevated, while managing a federal budget that accumulates roughly $2 trillion in debt annually.

Trump campaigned on the threat of a 1929-style depression if Democrats won midterms. He now claims the economy is booming, citing a recent report where employers added 165,000 jobs and unemployment fell to 4.1%. Despite this, he has vowed to work with the new congressional majority, though he has historically preferred working alone. Trump told reporters last week, “Me llevaré bien, probablemente, con los demócratas, a menos que quieran ser destructivos.”

The Federal Reserve may benefit from the political stalemate. Douglas Holtz-Eakin, an economist and president of the American Action Forum, said the Fed is a “surprise winner” of the election. A Democratic Senate could block Trump from filling Fed vacancies, potentially allowing Fed Chair Kevin Warsh to “siga sus instintos y reduzca agresivamente la inflación.” This independence is critical because inflation hit 3.7% annually, driven partly by Trump's tariffs and the war in Iran.

The debt problem complicates monetary policy. Interest payments on national debt now exceed $1 trillion per year, surpassing military spending. Treasury Secretary Scott Bessent and White House Budget Director Russell Vought are drafting a “fiscal consolidation plan” to address the deficit. Marc Goldwein, senior vice president of the Committee for a Responsible Federal Budget, noted that reducing Medicare costs would be the most straightforward way to lower deficits and interest rates.

Artificial intelligence presents a mixed economic picture. Jason Furman, a Harvard economist, calls the AI investment boom comparable to the late 19th-century railroad era. His tool Econvitals detected an 80.6% jump in data center construction over the past year. However, Furman warns that reliance on one sector creates vulnerability. If AI-driven growth slows, consumer spending could drop, hurting the broader economy.

Social Security faces a funding cliff. The program is projected to run out of money by 2032, at which point benefits would fall by nearly a quarter. Senator Elizabeth Warren of Massachusetts is working with Senator Bernie Moreno of Ohio on a bipartisan plan to raise the payroll tax cap. Warren noted that previous bipartisan efforts failed because Republicans feared Trump, but the urgency of the Social Security timeline demands immediate action.

Neither party campaigned on deep spending cuts. Trump seeks $500 billion annually for the military, while some Democrats want to restore expiring Affordable Care Act subsidies. The government must balance these competing demands while attempting to bring inflation down to the Federal Reserve's 2% target, a level not reached in nearly six years.