Much is said and heard of the Trump economic policy and its impact on both the US and the rest of the world. The dominant media, as they propagated the defeat of the Democratic candidate, so they sow trampophobia – they forget, of course, to say that the economy worldwide was going on in Trump.
Donald Trump will return to the White House after a four -year break and will now have foundations in Congress. In the Senate, Republicans can count on at least 51 of the 100 seats, while in the House of Representatives the end result will be known in a few days (and there is a lead).
According to media reports, the candidates for the position of finance minister are John Paulson and Howard Lutnick, the owner Hedge Fund Scott Bessent, as well as some people who were already active in Trump’s first term, such as Robert Lighthizer (then US Commercial Representative), Jay Clayton (then chairman of the US Securities and Exchange Commission), Larry Kudlow (then director of the President’s Financial Council) and Bill Hagerty (then US ambassador to Japan). Jamieson Greer, who was the right hand of Lighthizer, is being examined for the position of trading spokesman – an important office in view of Trump’s tariff plans – along with Lighthizer and Hageerty.
Assumptions
The problem with the assessment of the financial impact of a Trump presidency is that it has presented many and sometimes contradictory ideas during the election campaign. In addition, some measures, especially in the foreign trade sector, will spark reactions. It is almost impossible to appreciate what will be the pure impact on growth and inflation.
The assumptions about the breadth and impact of the measures are:
(a) Duties: Donald Trump’s economic policy focuses on tariffs, which he considers a financial panacea. The new president is discussing the possibility of a general tariff at least 10% and a 60% protective rate on imports from China.
If all these measures are implemented, the average US duty rate will rise to the highest level since the 1930s (for more information please read the analyis titled “The new era of tariffs and the return of economic nationalism“). However, it is legally unclear if the president has the power to import duties.
According to the Constitution, Congress has the power to impose and collect taxes, duties, … to regulate trade with foreign nations. ” (Article 1, section 8). According to the prevailing view, Congress does not have the right to assign such constitutional powers to someone else, such as the president.
The President could only impose duties in the event of an emergency. Therefore, we expect Trump to fully fully fulfill his threats, with China most likely the main goal.
(b) Taxes: At the end of 2025, Trump’s income tax cuts will expire during his first term. Now he wants to expand them while promising further reduction in the corporate tax rate (21%today) – although the details of this are not clear.
Overall, his plans are expensive: the Commission for a CRFB responsible federal budget estimates that the extension of income tax cuts would increase the deficit by $5.4 trillion in the next 10 years. According to CRFB, further reduction in the corporate tax rate will cost between $150 and $600 billion.
The wide range is explained by the fact that the details of this reduction are still completely unclear. Trump’s promised tax exemption for pensions would increase the deficit by $1.3 trillion.
All tax plans would increase the deficit between 6.8 trillion and $15.7 trillion in the next ten years, with a central estimate of $10 trillion. The Penn-Wharton budget model has a $5.8 trillion deficit over ten years, but this does not take into account some of Trump’s less clear designs.
In comparison, the Congress Budget Office provides for a $22 trillion deficit in ten years under current legislation, which corresponds to 6.3% of GDP. Trump will probably push the deficit over 8%.
(c) Migration: Migration, especially illegal immigration, was one of the central issues in the election campaign.
Trump promised to deport illegal immigrants. Many of these immigrants work in work tension areas such as construction, agriculture or hospitality. If there are mass deportations in these areas, wages in these areas are likely to increase. This would have a further increase in inflation. However, the US seems to control the immigration problem, partly thanks to the change of cruise from the Biden government.
The number of illegal immigrants arrested at the border with Mexico has declined dramatically in recent months. Therefore, Donald Trump could be limited to a few thousand deportations.
Growth and inflation
Deals increases are likely to have a positive effect on the development of the short term, as demand in the US will be diverted to domestic products. However, retaliation from commercial partners are likely to weaken the result in the medium term. The escalation of commercial disputes will intensify economic uncertainty.
Companies should reorganize their supply chains, which will lead to additional costs.
In such an environment, companies will be reluctant to invest. However, the most intense impact of Trump’s plans will be felt in the field of inflation.
If it actually imposes 60% duties on imports from China and 10% on all other imports, both results could lead to prices increase by 1 percentage point each. However, any lower passage to consumers and the dollar appreciation could mitigate these effects.
It is realistic to assume that new duties will come into force by the mid -2025, which could increase the price level by about 1 percentage point on a horizon of twelve months.
Is there a risk of conflict with Fed?
The Fed is in a difficult position due to the forthcoming policy change. Even now, neither the market nor the Fed members themselves are absolutely sure that the order of interest rates initially expected will be implemented. The Fed, in its own words, is pursuing a monetary policy on a session.
The reduction of interest rates expected for tomorrow and possibly December is relatively sure. At the latest by spring, when it becomes apparent that the duties will be implemented, the Fed decisions for the Fed decisions will have changed significantly. Therefore, ‘we expect the Fed to stop interest rate cuts to 4.00%(previous provision: 3.50%, the upper limit of the target corridor is currently 5.00%). However, the central bank is unlikely to officially announce the end of the interest rate reduction cycle, but will refer to the data.
Markets
Market reactions show a significant increase in bond yields, by about 15 basis points in 10 years bonds. This is likely to reflect concerns about higher offering government bonds due to increasing fiscal deficits and the risks of inflation.
At the same time, the dollar was significantly released by about 1.1% against the average coins of G10. Obviously, investors believe that the Trump Presidency will be positive for the dollar.
It can be like that. If Trump applies his inflationary measures, but at the same time, contrary to his statements, he does not intervene in the independence of the Fed, the dollar will be depleted. If inflationary measures are taken on the other hand and at the same time controlled the Fed, the policy mix we have will lead to a very significant weakening of the US dollar.
- Overall, we therefore regard the medium -term risks to the dollar as asymmetric.
- In the stock markets, the influence of market policy should not be overestimated in the long run.
- The S&P 500 brokerage index, for example, recorded relevant similar profits under the last presidents.
- The only exceptions were the two terms of George Bush, when the technology bubble burst and Lehman Brothers’ bankruptcy shocked the markets.
