Donald Trump, the newly inaugurated 47th President of the United States, is wasting no time in implementing his agenda. With a reported stack of 100 executive orders at his disposal, Trump plans to bypass political gridlock to push through his key initiatives. Investors are on edge: what will this mean for the US economy?
Top priorities include higher trade tariffs and stricter immigration rules, measures likely to drive inflation. At the same time, Trump is pursuing tax cuts and deregulation, which could have a deflationary effect.
“The only certainty is the high degree of uncertainty about the eventual impact of Trump’s policies,” said Simon Wiersma, investment strategist at ING. He noted that the inflationary effects will depend heavily on the execution and timing of Trump’s policies.
“The new US policies will most likely feed further financial market volatility,” Michael Strobaek, global chief investment officer at Bank Lombard Odier, told clients. “Investors will have to brace for turbulent times. With the right investment drivers in place, even a wild ride can prove rewarding.”
Inflation already in motion
US inflation already appears to be on the move. In December, the cost of living rose by 2.9 percent year-on-year, up from 2.7 percent the previous month. Core inflation, excluding food and energy, eased slightly to 3.2 percent from 3.3 percent. For investors, it is critical that inflation cools enough for the Federal Reserve to lower interest rates further.
Trump appears determined to push through his agenda, even if it means testing the limits of his authority. During a Republican party meeting earlier this month, insiders revealed plans already in place to raise trade tariffs and tighten immigration rules.
Trade tariffs and economic impact
Trump has pledged to immediately increase import tariffs: 25 percent for Canada and Mexico, and 10 percent for China. While higher import costs are expected to fuel inflation, the new Treasury Secretary, Scott Bessent, has downplayed these concerns.
“Tariffs are about national security,” Bessent said earlier this month while defending his appointment before Congress. He highlighted the importance of secure supply chains and the dollar’s role as the world’s reserve currency.
However, according to Tiffany Wilding, economist at Pimco, the economic impact of these tariffs will likely remain “within manageable bounds.” “But if Trump takes further measures to address trade imbalances, the consequences for the global economy and financial markets could be significant,” she warned.
In such a scenario, the US stock market could underperform relative to other markets, and dollar volatility would increase, Wilding added.
Tax cuts as the ‘key economic question’
One of Trump’s flagship policies is expanding the tax cuts introduced during his first term. According to Bessent, failing to do so would be “an economic disaster.” “As always with financial instability, it’s the middle and working classes that suffer most,” he stated during a Congressional hearing. He called tax cuts “the most important economic question of our time.”
These tax cuts could drive inflation further by boosting purchasing power and stimulating demand, Wiersma explained. On the other hand, deregulation could reduce production costs, tempering inflationary pressures. Wiersma expects inflation to trend slightly higher this year.
Tipping point for national debt?
Another direct consequence of tax cuts is a rising national debt. While manageable for now due to low interest rates, economists at Fidelity Investments warn that 2025 could mark a tipping point. “If the new administration worsens fiscal projections, higher bond yields and stock market volatility will follow,” wrote Dirk Hoshire, head of research at Fidelity.
Over the past two decades, US national debt has tripled to nearly 122 percent of GDP. The budget deficit for 2024 is estimated at almost 7 percent of GDP, a peacetime record. Even with stable interest rates, the cost of servicing the debt is expected to rise. To maintain debt at its current level, interest rates would need to average just 1 percent over the next decade—an “utopian scenario,” according to Hoshire.
Markets await clarity
So far, financial markets have remained indifferent. The US continues to serve as a safe haven, buoyed by relatively strong economic growth and low interest rates. Economic growth is expected to remain stable, with real GDP growth of around 2 percent in 2025. Unemployment is forecast to stay low, between 4.2 and 4.3 percent.
Despite this, ING in November lowered its US equity allocation and adopted a more neutral position in bonds, citing high equity valuations and low risk premiums.
“Higher interest rates weigh on equity valuations, leaving little room for significant price increases driven by valuation growth,” ING noted. Instead, corporate earnings growth is expected to be the main driver of equity gains in 2025.