With Donald J. Trump winning the White House and Republicans on track to take control of the U.S. Congress, we are expecting policy shifts that could have significant implications for fixed income markets. Among other proposals, the president-elect has called for broad-based tariffs and lower taxes for corporations and individuals.
While the Fed meeting today will inform our views further, here are some key takeaways from the election results:
- Growth: There are many unknowns about specific policies to come, and the personnel implementing them, but we think the growth outlook for 2025 could be modestly higher due to the election, with the potential for tax, energy and regulatory policies that may boost growth in subsequent years.
- Inflation: If Trump implements aggressive, broad-based tariffs immediately, goods prices could rise and lift year-over-year core CPI growth by 10 to 25 basis points in the first half of 2025. If tariffs are introduced more slowly, or are more targeted, the impact could be more muted. New limits on Immigration could raise wages, but also reduce consumer demand. Our base case remains that inflation will decline next year but remain above Federal Reserve target levels. We think investors should be wary of assuming that higher inflation is a certainty. The new administration is likely to focus on inflation reduction given the issue’s prominence in the election.
- Fed policy: Our base case was previously that the Fed would likely pause its rate cuts early next year given the growth and inflation outlook, regardless of the election outcome—a less dovish forecast than priced in by the market. We retain this view, although, with interest rate moves this week, pricing is now near our 4% target for the terminal rate.
- Longer rates: Similar to growth and inflation, we are looking for more detailed policies from the incoming administration to inform our views. Our base case is that there will be tax and spending cuts, with limited impact on the U.S. fiscal picture. Price volatility, which has generally centered on shorter maturities, could rise for longer bonds given crosscurrents tied to deficits, taxes, the term premium and Fed balance sheet. We continue to estimate U.S. 10-year Treasury fair value at around 4.25% (within a wide range)—a view that could change if fiscal policies diverge substantially from current expectations.
Overall, we will be watching for clues as to policy and personnel, and will continue to provide our thoughts as new developments emerge.
