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Donald Trump is an intriguing character who has the ability to disrupt markets as he enters. His aggressive statements regarding tariffs emphasize his determination, yet recent inflation trends and leading indicators are raising doubts about his approach. As inflation rises, he proposes additional tariffs, prompting the question: how can he simultaneously expect interest rates to decrease?
Will Trump Lower Interest Rates?
At least, that is what his statements suggest. He seems to promise tariffs on nearly all trading partners. For instance, a product from China costing one dollar will incur an additional tariff, bringing the price to 1.1 dollars, which will then be sold by American businesses at 1.2 dollars. This naturally leads to higher prices, as the narrative of replacing all imports with local production at a lower cost seems unconvincing in the short term due to numerous factors including labor costs and raw materials.
Interest Rate Outlook
The benchmark for interest rates, from long-term home loans to corporate bonds, is the yield on the US ten-year Treasury bond, which is influenced by various external factors. If the budget deficit narrows and bond prices rise while demand decreases, a drop in interest rates would be expected. This scenario balances the government’s borrowing by reducing debt.
Trump’s strategy, which appears strongest through increased energy supply, aims to provide cheaper energy to citizens and reduce inflation. However, the negative aspect is whether this approach will effectively aid the Fed’s focus on its volatile inflation measure while excluding energy prices.
Bond investors speculate that the gap between income and government spending will widen. Moreover, one of the reasons for Trump’s path to victory could be tied to these rising concerns, despite the inability of D.O.G.E to significantly reduce expenditures. A larger intervention is necessary, as last year’s average spending was 18.63 billion dollars per day. Perhaps one of Trump’s suggestions to halve military spending with China reflects these considerations.
Recently, the House Budget Committee approved a law targeting a 4.5 trillion dollar tax cut over ten years. Meanwhile, the military is still planning new spending of a hundred billion dollars, suggesting Musk’s efforts to cut waste may not suffice. Additionally, global energy prices are unlikely to see significant declines, as major exporters like Saudi Arabia are unwilling to increase oil supply.
