In recent weeks, significant developments within the economy and political landscape of the United States have emerged, set to influence global financial dynamics for the foreseeable future.

The Federal Reserve’s recent announcement of a 25 basis point reduction in the federal funds rate—bringing the range to 4.5%-4.75%—marks a crucial moment, especially following the substantial half-point cut in September. This strategic move appears to be aimed at ensuring a soft landing for the economy, and is an interesting one.

As outlined in the previous article (which can be found here), the Federal Reserve’s targeted inflation rate remains set at 2%. Currently, the Personal Consumption Expenditures (PCE) index stands at 2.7%, still quite far above the target. This raises a critical question regarding the frequency and aggressiveness of the rate cuts. The Fed, however, insists that the existing rates are still too high, ensuring that inflation is on a downward trajectory. The hope remains that the Federal Reserve’s forecasts are accurate; specifically, that the current rate cuts will not repeat the overinflation witnessed in past economic cycles and that the labour market will continue to exhibit stability.

The fed stands at an interesting, and key standpoint. The question stands, how direct and frequent further rate cuts should be. Despite the consensus opinion of the fed rate being elevated, since the cuts started in September, long term bond rates have unexpectedly continued to rise, causing mortgage and loan costs to also spike. The fed needs to be increasingly careful about rate cuts following now, considering these factors, particularly with the shadow of President-elect Trump looming.

Aside from the current circumstances of inflation, bond rates and unemployment that the fed must face, the key factor is Donald Trump. Not only does Trump’s election bring with it multiple questions on policy, but also implications on the independence of the fed, with Trump wanting to have a say in its decisions. However, the concern still remains on how the fed will cope and deal with the policy changes that will undoubtedly come following Trump’s election.

The biggest news in the world of course, in the past week, has been the re-election of the former president. Politics aside, Trump’s election victory has set into motion a large rippling effect that will have a significant impact on the economic sphere of the world.

Firstly, the word of the hour, tariffs. Trump has been extremely outspoken on his strategy for imposing tariffs on imports into the US. Tariffs of 60% or more on all Chinese imports and 10% tariff on goods from everywhere else. 

Tariffs are taxes imposed by one country, on the goods imported from another, to raise revenues, boost competitive advantages, or as an added tax to influence the country. Tariffs are usually added when countries become unhappy with their trading partners.

Trump imposed tariffs on China during his first term, which instigated a trade war between the two countries. China attempted to tackle this by diverting exports to other countries, but still suffered a significant GDP loss, and an economic damper due to the tariffs. To an extent, a weaker yuan helped in offsetting potential loss, by making exports cheaper, but a similar outcome, with the added tariffs, is quite unlikely. Another trade war could be at hand for the two countries.

Apart from tariffs on Chinese imports, the general 10% tariffs Trump plans to put into place for imports carry added risks for the US economy. 

US exports would be affected. Since foreign economic inputs would become much more expensive, US exports would reduce due to a contracted production of such goods. A global trade slowdown could occur, till countries begin exporting more within themselves, which could impact India significantly as well, having over 70 billion dollars in exports to the US last year.

Most importantly, due to inputs being more expensive, prices in the US market could see an increase. This could result in higher inflation in the market. With the pre-existing inflationary pressures, this unwanted overinflation as a result of tariffs could further complicate the fed’s job. If a sudden overinflated economy is indeed a cause of Trump’s tariffs, the fed could be forced to delay further rate cuts and dampen the enthusiasm held over Trump’s promises of cheaper capital, tax slashing and higher wages.

A big reason for investor optimism post Trump’s re-election was indeed the promised reduced regulation. The new government has assured investors that oversight will be eased, and a friendlier stance will be taken in terms of rules and regulations for banks and businesses. Mergers, acquisitions and dealmaking all face lighter regulation, and provide investors with a hopeful outlook for the future. A positive for the economy, the tax cuts and general economic expansion have the potential to spur economic activity, but the unwanted threat of overinflation looms over Trump’s big promises.

This term, Trump brings with him another man, whose decisions could influence the entire country and its budget: Elon Musk. Musk’s role as the head of the Department of Government Efficiency, sees him take on his favourite job once again: cost cutting. He has done it with his companies, and advocates for the slashing of costs rather vocally. His impact on the budget is something no one can predict now, but major cuts are on the way, as the Trump government aims for maximum productivity and efficiency.

The United States faces an interesting chapter ahead economically. As an investor, the hope remains that rate cuts follow, alongside the expected inflation cooldown, allowing for a robust labour market, which would, in addition with Trump’s regulatory relaxation allow for a period of strong economic growth. However, tariffs and Trump’s involvement with the fed could pose significant issues like overinflation and a global trade slowdown which would dampen investor sentiment and hopes. The world now must, as usual, turn its head towards the US and brace for impact.

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