Market Views: Will Trump's triumph affect US interest rates outlook?
In a remarkable political comeback that has sent ripples through global financial markets, Donald Trump has reclaimed the US presidency four years after leaving the White House.
The 78-year-old's victory on November 5, which came after a notably turbulent campaign period has prompted investors to begin recalibrating their expectations across multiple fronts.
Financial markets appear to be particularly focused on reassessing their Federal Reserve policy expectations in light of this significant political shift.
Many observers believe the anticipated path of US rate cuts in 2024 might need adjustment, as markets weigh the potential impact of possible policy changes on inflation trends.
Current market pricing indicates expectations of a 25 basis point cut in each of the last two Federal Reserve monetary policy meetings for this year.
However, looking further ahead, the picture becomes less clear. This potential shift comes against a backdrop of uncertainty around Trump's proposed economic agenda, which reportedly includes measures such as tariff adjustments, tax policy changes, and new immigration approaches.
AsianInvestor asked analysts and fund managers how they are anticipating the Fed will react to the new political landscape and whether the elections outcome warrants a revision of their current rate cut timeline.
The following responses have been edited for brevity and clarity.
Ju Wang, head of Greater China FX & rates strategy
BNP Paribas
We do not expect the election results to factor into the Fed's decision tonight and expect them to cut policy rate by 25 basis points.
Though markets may speculate immediately about fiscal policy changes or the potential for tariffs, a data-dependent Fed is unlikely to front-run those measures before Inauguration Day.
We will closely monitor Jerome Powell’s press conference on November 7.
The media will likely press Powell on whether Fed will tighten policy, and perhaps risk a recession, to fight inflation that could ensue from the new administration's policy.
We think Powell will decide that discretion is the better part of valor, and say simply that these policies are the province of the Administration and Congress and not the Fed, that the Fed will act according to its dual mandate, and that it will react to developments as they unfold.
Asian FX have reacted weaker versus the dollar, following the global theme and amid concern over tariffs. Asian central banks have been spotted in supporting local currencies this morning. Our base case is that the broad two-way range in USDAsia will hold in 2024.
A reactive move higher in the US dollar is more likely a mid-2025 event than now, given tariffs are unlikely to arrive before that.
Björn Jesch, global chief investment officer
DWS
The outcome of the US election is likely to affect all asset classes.
Take the likelihood of Trump introducing various trade tariffs. This is expected to strengthen the dollar in the short term as the terms of trade improve for the US.
In the mid-term, tariffs are also likely to have inflationary effects, pushing up interest yieldsa, and therefore the dollar.
At the same time, tariffs could weigh on economic growth, which is less good for the dollar.
The same can be said for US equities.
While they are widely expected to gain as a result of Trump’s potential corporate tax cuts and efforts to cut regulation, they could suffer from trade restrictions and lower GDP growth.
But clearly there will be no exceptions for non-US companies, so we expect certain European and Japanese companies to suffer from a Trump presidency. This will not only affect the equity side but also impact corporate bonds.
Overall, we believe that Trump’s tax cut plans have the potential to boost GDP growth, but that they will also increase the risk of inflation. Accordingly, the Fed will probably have to slow down its rate-cutting cycle.
Eli Lee, chief investment strategist
Bank of Singapore
Trump’s second Presidency is expected to be broadly supportive of the US economy and corporate earnings, although inflation risks could cause the Fed to pause or even stop rate cuts after March 2025.
However, we could see inflation and inflation expectations rising in 2025, which may lead the Fed to pause or even stop rate cuts after March 2025.
First, the incoming Trump administration is likely to extend tax cuts and increase the US fiscal deficit from its already very high levels of 6-7% of GDP.
At the same time, the prospects of much tighter immigration controls and sweeping tariffs are also likely to increase inflationary pressures.
Thus, the Fed may be forced to stop cutting interest rates after March and even consider increasing the fed funds rate again later in 2025 if core inflation gets stuck well above the Fed’s 2% goal.
The prospects of less Fed interest rate cuts, more expansionary fiscal policy and inflation-raising tariffs have already caused 10 year US Treasury yields to rise sharply from 3.60% in September to above 4.40% now, exceeding our 12-month forecast of 4.25%.
In our tactical asset allocation, we upgrade US equities from neutral to overweight, given improved risk-reward from Trump’s anticipated fiscal spending, tax cuts and deregulation.
We turn overall underweight in fixed income and cautious on duration risks.
Sonal Desai, chief investment officer
Franklin Templeton Fixed Income
With a Trump presidency, we should anticipate that he will continue to speak on interest rates.
However, he has come out and said he doesn’t believe he should have the ability to dictate those interest rates.
The broader political pressure is something the Fed has lived with in the sense that every time US Federal Reserve Chair Jerome Powell goes up in front of Congress, he either gets beaten up by the Republicans or the Democrats. This is a time-honored tradition.
I tend to believe more in the strength of the institution and therefore assume that the more dramatic changes that people are worried about are unlikely to come.
If I just look at Treasury yields, we've already started seeing the Republican sweep priced in, which several weeks ago seemed highly unlikely.
And we are seeing a Treasury sell-off. That is an acknowledgement of the fact that budget deficits are expected to become a lot higher.
Noel Dixon, senior macro strategist
State Street Global Markets
My view is that we do not expect the US election results from last night to alter the Fed’s decision at least in the medium term.
It is impossible for the Fed to plan for fiscal policy that has not been fleshed out just yet.
Even though the Republicans won the House and Trump is now in a red wave scenario, fiscal policy will likely not be implemented until the latter half of 2025.
For the rest of this yearm we expect the Fed to lean on economic data to make its next few policy decisions.
As a result, we expect it to continue its rate cutting path this year.
However, once we get to the beginning of next year, rate cuts become tougher as the Fed will have to start to consider not only fiscal policy but where the neutral rate is.
David Chao, global market strategist, Asia Pacific (ex-Japan),
Invesco
Due to Trump’s pledge to begin the deportation of 15-20 million illegal immigrants immediately, it could be very inflationary since the labour market is already tight.
However, the Fed would be unlikely to react with monetary policy changes until inflation shows up in the data, which could take time.
We have seen an outsized reaction in markets in terms of US stocks, and it will likely be up to the Fed to help support a sustained stock market rally.
Therefore, we will want to look to Fed Chair Jay Powell for clues as to what might cause the Fed to slow down or even pause its easing cycle.
In summary, my base case remains an economic re-acceleration next year for the US and most other major economies, which should be supportive of risk assets.
I remain constructive on emerging market (EM) assets, particularly for EM Asia. Asian economies are resilient, face less inflationary pressure, and are set to outpace DM (developed) market growth in the coming year. Their equity market valuations are much more attractive.
Moreover, China’s policymakers are set to unleash further fiscal and monetary stimulus. Many Asian economies benefit from the AI investment theme, and Asian central banks have started to ease monetary policies.
While Trump’s re-election may bring near-term volatility to Asian markets, I think investors will care more about valuations and growth differentials rather than trade tensions.
Marcelo Assalin, head of emerging markets debt (EMD) team
William Blair
Despite displaying strong opposition to US Federal Reserve (Fed) Chairman Jerome Powell in the past, Trump has recently softened his rhetoric, publicly saying that he would let Powell serve out his term.
Moreover, there seems to be limited legal scope for interference: US law states that a sitting president can dismiss any Fed official, but only for “cause”—not because of policy differences.
However, we believe investors should expect a strong attempt to renew Trump’s flagship 2017 tax cuts and further reduction in corporate taxes.
Higher tariffs on imports also appear to be very likely, although the magnitude would likely vary across trading partners.
In the United States, higher tariffs on imported goods would likely lead to a temporary increase in inflation.
Higher prices should, in turn, impact demand, potentially temporarily denting economic growth. We would not expect the Fed to react to such transitory inflationary pressures.