People are wondering if Vice President Joe Biden will stay in the race for president. At the same time, people in the financial markets were thinking about how the economy might be affected by Donald Trump’s tariff plans if he wins the Republican nomination.
A lot of people in the market were counting on inflation to keep going down, the U.S. Federal Reserve to start lowering interest rates, and the world’s largest economy to have a “soft landing” without a recession or big job losses. Any changes to these ways of thinking could lead to more volatility, especially in U.S. stocks, which have set a number of closing records this year, and in the Treasury market, where 2-
4.519% for TMUBMUSD02Y and 10.1% for 10-year bonds BX:On Tuesday and Wednesday, TMUBMUSD10Y fell to its lowest levels in four and five months.
For now, economists think that if Trump wins another term, the Federal Reserve will likely cut interest rates less than expected. This is because higher tariffs will cause prices to rise. Forex traders have been planning for up to five or six quarter-point rate cuts by June of next year. This would bring the main interest rate target down to either 4.25% to 4% or 3.75% to 4%.
Wells Fargo’s Chief Economist Jay Bryson and econometrician Azhar Iqbal met on Thursday.
WFC (-0.15%) said they think that tariffs on all goods will cause a “modest stagflationary shock,” in which both inflation and the U.S. unemployment rate rise, though probably not as much as they did in the late 1970s and early 1980s.
A large macroeconomic model was used to look at four possible outcomes that could happen if either Trump or Biden wins in November. Bryson and Iqbal came to the conclusion that the worst possible start for the economy would be if America’s trading partners responded to Trump’s tariffs with their own 10% taxes on U.S. exports. This would cause the real GDP to drop by 0.4% next year.
But they said that growth could start to rise again in 2026 if the Federal Reserve lowers its interest rate target more than it normally would because of this. Bryson and Iqbal also think that the unemployment rate will rise from 4.1% in June to 4.8% in 2026, in what they called a “Trump + retaliation” scenario, but then fall back down.
Bryson and Iqbal wrote in their Thursday note, “In short, putting tariffs on all of America’s trading partners would give the U.S. economy a small stagflationary shock.” “However, the model results show that the rise in both the unemployment rate and the inflation rate at the same time would not reach the levels of stagflation that happened in the late 1970s and early 1980s.”
Adding up the percentage change from one year to the next in the consumer price index and the unemployment rate gives us the Misery Index. The U.S. Department of Labour and Wells Fargo Economics took the picture.
In a “Trump + retaliation” scenario, their model shows that the Federal Reserve could lower the fed-funds rate target to below 2% between 2026 and 2029. However, the Wells Fargo team added a caveat: “If the imposition of tariffs causes inflation to jump higher, then the FOMC [Federal Open Market Committee] may not cut rates as aggressively as the model estimates.”
As of Thursday, polls still show that Trump is ahead of Biden, even though last month’s debate made people wonder about Biden’s age and health. As reported in the news, Biden has tested positive for COVID-19. Democrats in Congress are still pushing him to drop out of the general election on November 5 because they think he will make it harder for candidates for the House and Senate.
It was in May that Biden raised tariffs on $18 billion worth of goods from China. The Wells Fargo team said that this action does not “move the needle in a $28 trillion economy.” On top of that, the president agreed to keep most of the tariffs that were put in place by the previous Trump administration.
Also, Trump has said that if he wins the presidency again in 2025, he will put a 60% tariff on China and a 10% tariff on all other trading partners. The nonpartisan Tax Foundation in Washington, D.C., studies tax policies. Last month, they said that Trump’s tariff plans could cut the GDP by at least 0.8% and jobs by the same amount as 684,000 full-time jobs. They said those numbers don’t take into account the chances that other countries will respond or the other problems that would arise from a global trade war.
Thierry Wizman, a global FX and rates strategist at Macquarie, thinks that the U.S.’s “neoliberal vision of policy management” might be dying out and being replaced by a “populist economic vision,” which he called “popunomics.”
“The U.S.’s populunomics are meant to cause inflation.” “Inflation in the U.S. may stay low for a while longer, which would allow the Fed to begin easing in September,” Wizman wrote in a note on Thursday. “But as soon as “popunomics” is used, inflation will be a part of the system.” It’s possible that U.S. yields will go up again, and the Fed’s easing cycle will be shorter than expected.
Two-The 30-year Treasury yields on TMUBMUSD02Y are 4.519%. BX:TMUBMUSD30Y ended the day slightly higher on Thursday as traders thought about the possibility of the U.S. central bank cutting rates more slowly than expected. All three of the major U.S. stock indexes (DJIA, SPX, and COMP) ended the day lower. The Dow Jones Industrial Average fell 1.3%, or 533.06 points, just one day after setting its 22nd record close of the year.
