Source: Cailian Press Author: Huang Junzhi

The Wells Fargo team stated in their latest report that if Trump is re-elected and implements a comprehensive tariff plan causing inflation to rise, the Federal Reserve may not cut interest rates as much as expected.

As Trump's chances of winning increase amidst the Biden situation, concerns in the financial markets have arisen about his economic agenda, including his increase in tariffs and tax reduction plan. As far as the current state of the US economy is concerned, investors night and day anticipate nothing more than cooling off inflation, the Federal Reserve cutting rates, achieving a soft landing, and avoiding economic recession and extensive unemployment. However, Trump 2.0 seems to have a counter-effect.

But Trump 2.0 seems to have a counter-effect.

At present, analysts conclude that considering the inflationary impact of increased tariffs, Trump's second term may ultimately lead to a lower-than-expected interest rate cut by the Federal Reserve. According to CME's Federal Reserve observation tool, the market is generally expecting the Federal Reserve to cut interest rates five times before next June, which will bring the policy rate range to 4% to 4.25%.

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On Thursday, Wells Fargo's Chief Economist, Jay Bryson, and Econometrician, Azhar Iqbal, stated that they expect the comprehensive tariff increase to cause a "moderate stagflation shock," with both inflation and U.S. unemployment rates rising, although the impact is unlikely to reach the level experienced in the late 1970s and early 1980s.

They used a large macroeconomic model to conduct their study. The final conclusion was that if the United States' trade partners retaliate against Trump's proposed tariffs by imposing a 10% tariff on U.S. exports, then next year's U.S. real GDP will contract by 0.4%.

In their so-called "Trump + retaliation" scenario, the U.S. unemployment rate would rise to 4.8% in 2026 from its current level of 4.1% in June, before declining again.

"In short, a comprehensive tariff on U.S. trading partners will bring a moderate stagflation shock to the U.S. economy," they wrote in their latest report. "That is to say, the model shows that the unemployment and inflation rates will rise at the same time, although not to the (severe) stagflation levels experienced in the late 1970s and early 1980s." They added, "And if the tariff increase leads to an increase in the inflation rate, the Federal Open Market Committee (FOMC) may not cut interest rates as much as expected."

"Moreover, if the tariff increase leads to an increase in inflation rates, the Federal Open Market Committee (FOMC) may not cut interest rates as much as expected," they added.

Last month, experts from the non-partisan Tax Foundation, which studies tax policies in Washington, estimated that Trump's tariff proposal could reduce U.S. GDP by at least 0.8% and lead to job losses equivalent to 686,000 full-time jobs. They pointed out that these numbers did not take into account the risk of retaliation by other countries, nor did they consider the additional consequences of a global trade war.

Macquarie's Global Forex and Interest Rate Strategist Thierry Wizman has said that America's "neo-liberal policy management vision" may be disappearing and is being replaced by a "populist economic vision", which he calls "populist economics".

"The 'populist economics' of the United States, in essence, is inflation. US inflation may continue to remain low over the next few months, which would allow the Federal Reserve to ease policy from September onward. But once 'populist economics' are truly reflected, inflation will become a characteristic of the system. US Treasury yields may rise again, and the Federal Reserve's easing cycle may be shorter than expected," he wrote in Thursday's report.

Editor/Lambor