A Wall Street company is different from others; they believe the incoming USA president Trump is committed to the proposed tariffs. The company now thinks that USA Consumer Prices (CPI) could face a "permanent shock," and the Federal Reserve may need to keep interest rates above normal levels.

BNP Paribas stated that it assumes Trump will implement "most or all of his campaign commitments on foreign, economic, and Trade policies, including those measures that could harm the USA economy, such as import tariffs."

In the past two weeks, US stocks have soared to historical highs, with the Nasdaq closing above 20,000 points for the first time on Wednesday. Additionally, federal funds Futures traders expect the Federal Reserve to cut interest rates next week, with the possibility of up to four additional 25 basis point cuts each quarter by the end of next year.

At the time of these dynamics, many market participants still hope that Trump's tough rhetoric on tariffs is ultimately just a negotiation strategy.

According to BNP Paribas's Thursday report on the "2025 Global Outlook," if Trump's words are taken literally, the USA economy, which was expected to achieve a soft landing in early 2025, might stagnate in 2026 due to the new president's tariff and immigration policies, offsetting his measures to promote economic growth. The bank also expects market participants to begin forecasting higher USA inflation rates and that the Federal Reserve's rate cuts will be fewer than currently expected.

According to BNP Paribas's report: "Some argue that Trump's policies (particularly tariffs) will not lead to inflation, citing (i) he will not implement these policies, (ii) the dollar will fully offset their impact, (iii) there will be no second-round effects. We find this framework misleading. We believe Trump will implement—if not all—most of the tariffs he has threatened."

BNP Paribas also stated: "We expect the USA Consumer Price level to face a permanent shock (about 2 percentage points), while USA inflation will be temporarily affected. However, we expect inflation expectations will not loosen. In other words, we believe that maintaining a restrictive policy for a longer time would allow the Federal Reserve to control long-term inflation expectations."

Here are the projections of BNP Paribas for the upcoming year:

The tariffs anticipated by Trump could directly raise consumer prices by about 80 basis points. "However, we believe tariffs will not only affect inflation through rising prices of imported goods but also have a second-round effect on the overall price level." BNP Paribas's model found that the rise in import prices would broadly transmit to other commodities, services, and wages, amplified by short-term momentum.

Assuming the Federal Reserve cuts rates by 25 basis points next week, the upper limit of the Federal Reserve's main interest rate target for 2025 should remain at 4.5%. The federal funds rate target is currently between 4.5% and 4.75%.

The yields on US two-year, ten-year, and thirty-year government bonds are expected to reach 4.55%, 4.65%, and 4.8% respectively by the end of 2025, levels that are higher than where they could be by the first quarter of next year.

There is further room for the US dollar against the Mexican peso and Canadian dollar to rise.

A stronger dollar and the Federal Reserve's inaction should suppress Gold prices in the second half of 2025, although the Metal will reach new highs in early parts of next year.

As tariffs take effect, Crude Oil Product prices may face Put pressure in the second half of 2025.

Last week, more signs indicated that US inflation might be harder to tackle than many imagined. The CPI annual rate in November slightly rebounded to 2.7%, up from the previous value of 2.6%.

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Editor/Rocky