It’s no secret that President-elect Trump wants to quickly enact new and expanded tax cuts in his second term. While Trump’s fiscal policy changes are expected to add to US deficits, the extent remains uncertain. Investors will closely watch how Trump’s campaign promises translate into actual legislation in 2025.  

The Trump campaign has floated the idea of exempting social security benefits and tipped wages from income tax. Trump also said he would be open to lowering the 21% corporate tax rate to as low as 15% for domestic production.  

Trump campaigned on repealing the Inflation Reduction Act and increasing tariffs on imported goods to raise revenue, offsetting the cost of tax cuts. But we don’t think that offsetting the extension and expansion of the landmark 2017 tax cuts with tariff-related revenue is realistic.

President Trump has pledged to increase tariffs on a broad array of nations and imports, including a 60% tariff increase on 100% on all imports from China and a global minimum tariff as high as 20% on all US imports.  

As always, there’s an art to separating what Trump threatens from what he implements. We could easily envisage actual tariffs being lower and affecting a smaller percentage of imports. Trump may consider adjusting implemented tariffs on goods with a high direct impact on consumers. In the past, he’s been amenable to the concerns of business leaders (and the performance of the stock market) when considering how tariffs should be implemented.

We think the risk of global minimum tariff is lower. A global minimum tariff seems too blunt an instrument, and we see it as more as a bargaining tool than a policy risk.

From a timing perspective, we think Trump can move quickly to increase tariffs on China in his second term – no new legislation is needed to boost tariffs. But there is a risk of delay if Republicans want to earmark that tariff revenue to offset some of the cost of upcoming tax cut legislation.

Suffice it to say, there is a lot of uncertainty about both timing and implementation of tariffs. What looks clearer is that Trump’s victory only adds to the broader theme of trade becoming more protectionist and unilateral over time, which is a theme we discuss in more depth. It also lends weight to worries that inflation will remain higher for longer, provoking a slower Fed easing cycle.

The markets are more than familiar with Donald Trump’s America First approach to foreign policy. In short, we define his strategy as exploiting America’s economic and military power to win concessions from its allies and adversaries.  

Trump has also pledged to end Russia’s war in Ukraine in just 24 hours, and in September suggested that the war could end even before he takes office in 2025. We think this implies a desire to push Ukraine to the negotiating table, on terms that might be more favourable to Russia.

Meanwhile, we expect a return to less critical support for Israel. Trump may see escalation of Israel-Iran hostilities as a reason to impose further sanctions on Iran and step up the enforcement of existing Iranian oil sanctions.

There could also be a change in the US’ relationship with Saudia Arabia, which may have important implications for global oil supply. The Biden administration’s overtures to Saudi Arabia and OPEC+ to increase oil supply have largely fallen on deaf ears, while negotiations about a US-Saudi defence pact have stalled since the onset of the Gaza war. There could be progress on both fronts in the early days of the Trump administration.

As for Fed policy, we think that the easing cycle will continue as planned over the remainder of 2024 – though increases in tariffs and new fiscal stimulus might reduce the scope for policy easing next year.

But Donald Trump has made clear his desire for lower interest rates and has repeatedly stated his belief that the President should have a say in monetary policy. He’s also reportedly considered moves to weaken the Fed’s independence. Those changes may be a bridge too far, but Trump could also consider replacing Fed Chair Jerome Powell before his term as Fed Chair ends in May 2026.

We’re not convinced he’d be able to fire Powell. What’s more, Powell won’t go without a fight – at a November press conference he stressed that efforts to fire him are not permitted under the law and has repeatedly said he will not resign early.

An alternative option might be to try to demote Powell, although Trump may run into problems replacing him with a kindred spirit as all the seats on the Fed’s current Board of Governors are currently filled.

Aside from Powell, a possible change at the Fed could come at the supervisory level. Republicans have been critical of the Fed, including current Vice Chair for Supervision Michael Barr. As a result, they may quickly try to put a Republican appointee into that seat, with current Board member and Trump appointee Michelle Bowman an obvious potential candidate.

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