A month before the future President of the United States, Donald Trump, takes office, all eyes are on the Fed. The Federal Reserve’s Monetary Policy Committee (FOMC), which meets Tuesday and Wednesday, is expected to cut the central bank’s key rates by 25 basis points, bringing target rates down to 4.25-4.5%.
And after? “We are entering the world of unpredictability, because no one today knows what President Donald Trump is really going to do and it is not certain that he really knows it himself”says, perplexed, Anton Brender, chief economist at Candriam.
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“The return of Trump will lead us towards more constrained monetary policy trajectories than expected in the United States and this will be the key element for reading 2025”agrees Philippe Dauba-Pantanacce, economist at Standard Chartered. Because, at a time when Christine Lagarde, President of the European Central Bank (ECB) announces further rate cuts, the trajectory seems much less accommodating across the Atlantic.
A more restrictive approach than expected
“We expect only two rate cuts from the Fed, of 25 points each, including the one in December”anticipates Gilles Möec, chief economist at AXA Investment Managers (IM), a less accommodating projection than the market consensus which expects 3.5% in 2025.
“While remaining rather positive on the United States in 2025, our growth forecasts are on the other hand significantly below the consensus for 2026. For two reasons: the toxicity of Donald Trump’s program will begin to be felt, with an acceleration in “inflation, but the main reason is the direction of the Fed which will be prevented from continuing to lower rates”he continues.
As soon as Donald Trump was elected, and before he did anything, the markets revised their expectations of a Fed rate cut in the next two years upwards by around 100 basis points. The president was supposed, in the minds of investors, to “boost” growth through his tax cuts and the deregulation of certain sectors, such as tech, oil and banking, and not through a return of inflation.
And yet. As Gilles Moëc notes, “a line of resistance is emerging on American inflation, which would obviously be magnified by Trump’s largely inflationary policy.”
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Ideology or pragmatism
In this context, the Fed should remain at the ready while it assesses the economic and budgetary policy implemented by the new administration. On the surface, the Trump administration’s 2.0 agenda was well explained during the presidential campaign. The first appointments, including those of the Trump family to ambassadorial positions, give the impression of a government made up of radical ideologues, convinced of the merits of this program. Only the appointment of financier Scott Bessent to the Treasury could be reassuring, even if the latter intends to make Europe pay the (heavy) price of American military protection.
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If Donald Trump were to implement all of these electoral promises, the bill could, however, be heavy for the American economy.
“In this scenario, the Fed would be forced to stop lowering rates to try to stem an upward drift in wages, or even then to raise rates if the labor market were to tighten again,” says Anton Bender.
For the record, Donald Trump proposes to raise customs duties to a level of protection equivalent to that of 1929 and to expel 9 to 10 million illegal migrants. However, the job market already appears tense with an estimated 150,000 entries per month, and already reduced to 50,000 since the summer. Without forgetting his promise to increase hydrocarbon production (shale) by 3 million barrels/day, an unrealistic objective with the price of a barrel being “cheap”, another commitment from the Republican.
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As for tax measures, the mere extension of existing measures (and therefore without stimulating growth) would already cost 5,000 billion dollars over ten years. This is undoubtedly why Donald Trump wants to dismantle the support plans of his predecessor Joe Biden, or even increase customs duties, just to finance his tax cuts.
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Restoring force
“The worst is never the most certain”, nuance Anton Bender. The magnitude of the different measures advocated by Trump can vary considerably and affect the economy to distinct degrees. In a “soft” scenario (campaign customs duties, stopping illegal immigration, moderate tax support), “the Fed should not dramatically change the course of its policy and continue to lower rates towards 3.5% in 2025”, advances the economist.
“There will be an opposition between the vision of the ideologues and a more pragmatic vision, with a Donald Trump able to absorb, or not, economic costs which would very quickly become political costs,” analysis Philippe Dauba-Pantanacce.
Especially since, very quickly, the new president will have to prepare for the upcoming mid-term elections in November 2026, which are rarely favorable to the elected president. “ There will undoubtedly be a sequential execution: the whole question is to predict when there will be a change of course”asks the Standard Chartered economist, responsible for economic research on global geopolitics.
One thing is certain: Donald Trump does not like to see the stock market fall. If rates remain high, or even if 10-year rates soar towards 5%, American stocks, already valued well above their historical average, especially in the Tech sector (overvalued by 35%, according to Natixis IM estimates), are likely to fail, taking credit with it in its wake. Wall Street will perhaps be the only force to recall Donald Trump.
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