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In the 2024 US presidential election, former President Donald Trump secured a return to the White House, defeating Vice President Kamala Harris. Trump's victory was solidified by winning key battleground states, including Wisconsin, North Carolina, Georgia and Pennsylvania, surpassing the required 270 electoral votes.
Concurrently, the Republican Party regained control of the Senate, securing at least 53 seats, and has retained a majority in the House of Representatives.
These outcomes are poised to influence the nation's economic landscape. Below we answer some of the most asked questions by our clients.
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Read moreIt’s the economy. Exit polls confirmed that Americans voted with their pocketbooks. The economy was the second most important issue for voters, second only to democracy. In exit polling conducted across 10 key states, NBC News found that 67% of voters described the economy as “not so good or poor,” while 75% noted “moderate to severe hardship” from inflation.
This is interesting in that it contrasts with the underlying robust state of the US economy, which was growing at a solid 2.7% year over year (y/y) pace in Q3 2024 while the unemployment rate remains at a historically low 4.1% as of October. Meanwhile, Consumer Price Index (CPI) inflation stood at 2.4% y/y in September while the Fed’s favored inflation gauge, the deflator for the personal consumption expenditures, rose 2.4% y/y, just ahead of the Fed’s 2% target.
As we have frequently stressed, the way to bridge this apparent gap is that voters don’t care much about actual inflation. Instead, they continuously report “cost fatigue” related to current price levels and cumulative inflation relative to pre-pandemic. CPI is up 22% since December 2019.
The immediate financial market reaction reflected expectations of stronger economic growth and wider deficits that could fuel higher interest rates and inflation. Interestingly, some of these Trump trades have reversed with Treasury yields ending the week roughly where they started.
The 10-year Treasury bond yield soared by 19 basis points (bps) to 4.48%, before easing back to 4.30% after the 25bps Fed rate cut. The S&P 500 rose 2%, to a new all-time high, while the Russell 2000 rose 4%. The S&P extended those gains after the Federal Open Market Committee (FOMC) meeting, rising a cumulative 3.3%. The US dollar jumped 2% with weakening currencies elsewhere on expectations of rising protectionism and a more hawkish Fed. About half of these gains were reversed at the end of election week.
No, the near-term outlook for the US economy remains unchanged.
The first thing to acknowledge is that the US economy is currently in a good place and carries solid momentum. Change to immigration and regulatory policy could have a short-term economic impact in the first half of 2025, but it’s likely to be marginal. Changes to tax and trade policy will have a more consequential impact on the economy, but it won’t be visible until early 2026.
While looser financial conditions could be a catalyst to stronger business investment and spending, we also note that heightened policy uncertainty could be a hindrance to greater private sector activity.
Solid income growth, pro-cyclical productivity growth and strong labor force participation remain the key pillars to the US economic outperformance. Selective consumer prudence in the face of high prices continues to drive disinflation, allowing the Fed to recalibrate monetary policy toward a more neutral stance. What appears to be unfolding before our eyes is a soft-landing scenario only the most optimistic dream of.
Looking ahead to the next six months, we foresee consumers and businesses still spending but doing so more prudently amid still-elevated costs and rates. We continue to expect a bifurcated consumer spending outlook with lower-income households with larger debt burdens exercising more spending restraint while families at the higher end of the income spectrum still spending, albeit with more discretion.
Factoring the changes to immigration, regulatory, trade and tax policy, we foresee minimal changes to the GDP growth, inflation and Fed outlook in 2025, but more pronounced changes to the 2026-27 outlook.
In short, we foresee real GDP growth at 2.7% in 2024, easing toward trend growth at 2.0% in 2025 (marginally lower than previously), and 1.7% in 2026 (about 0.3 percentage points (ppt) lower than previously). In 2027, we foresee growth picking up modestly to 1.8% (about 0.2ppt lower than previously).
We foresee headline CPI inflation closing the year around 2.4%, easing to 2.3% in Q4 2025 (marginally higher than previously) and 2.3% in Q4 2026 (about 0.3ppt higher than previously).
We continue to expect a 25bps cut to 4.25-4.50% in December. Thereafter, we believe the Fed may decide to slow the recalibration process as policymakers more carefully feel their way to a neutral policy stance. Considering the elections results, we now assume a rate cut at every other meeting in 2025, for a total of 100bps of easing in 2025, down from 150bps previously. This would leave the federal funds rate at 3.4% at the end of 2025.
In a Republican-controlled Congress, an extension of the 2017 Tax Cuts and Jobs Act (TCJA) at the end of 2025 via the budget reconciliation process along with efforts to roll back some Inflation Reduction Act (IRA) tax credits is a strong possibility but not a certainty.
As we have previously discussed, the looming TCJA fiscal cliff would have represented a drag on real GDP of 0.5% in 2026 and a cumulative drag of 0.9% in 2027, with an estimated price tag of around $4.5t through 2034. Given that some Republican lawmakers may be reticent to legislate such a large increase in the deficit and debt, lawmakers may opt for a temporary extension of the TCJA.
Since our baseline assumption had already integrated a partial extension of the TCJA, our new baseline will factor an additional cumulative boost of 0.3% of GDP from the full TCJA extension by mid-2026. In addition, we assume that the 100% bonus depreciation for qualified business equipment purchases, which has been phasing out since 2022 (60% in 2024), is reinstated. We also assume that Congress allows for immediate domestic R&D expense amortization instead of the post-TCJA five-year amortization period (15 years for foreign research). Combined, these depreciation and amortization measures would boost our baseline real GDP by a further 0.1% in 2026 and 2027 – for a total boost of 0.4% of GDP. None of these outcomes are certain, and there are a variety of possible tax policy outcomes that could result from the negotiations to come.
While there is a possibility that the President-elect and Congress will push for a reduction in the statutory corporate tax rate from 21% to 15%, we will wait to see which priorities on the Republican agenda are advanced before incorporating it into our baseline. According to the Congressional Budget Office (CBO), a reduction in the statutory corporate tax rate to 15% would add an additional $800b to the budget deficit.
Our analysis shows that lowering the corporate tax rate to 15% in 2026 would significantly boost business investment, leading to a 0.1% lift to real GDP in 2026 and a cumulative boost of 0.2% in 2027. This implicitly assumes a fiscal multiplier of 40 cents on the dollar in the first year – meaning that for every dollar in tax cuts there is a commensurate 40 cents increase in nominal GDP.
Instead of incorporating every campaign promise into our baseline, we believe it is more prudent to wait until congressional priorities become clearer and the actual contours of spending proposals are defined.
We know from the campaign trail that Trump would favor exempting earned tips, Social Security wages and overtime wages from income taxes, but it’s unclear how much support this would have in Congress and what the specificities would be.
There may also be efforts to cut funding for the Internal Revenue Service (IRS), the Environmental Protection Agency (EPA) and the Department of Education, while protecting spending on Social Security, Medicare, defense and veterans’ programs. And there have also been calls to repeal the Affordable Care Act and its subsidized health insurance marketplace, but nothing concrete at this point in time.
The Trump campaign has called for tariffs on US trading partners for various policy reasons, including to bolster US domestic products and industries, to level the playing field and for national security reasons.
While there is a non-negligible risk that broad-based tariffs are imposed on numerous trading partners, our baseline will assume the gradual imposition of more targeted tariffs on some sectors from China, Europe, Mexico and Canada. As such, we believe that protectionist measures will be used in more of a transactional manner to extort trade, immigration and other political concessions from trading partners.
On aggregate, we assume the magnitude of those tariffs would be larger than during the 2018 trade conflict with China, but only about a third of the impact of a scenario with broad-based 60% tariffs on Chinese imports and a 10% universal tariff on all imports from US trading partners. Specifically, we would assume tariffs on steel and aluminum from Canada, China, Europe and Mexico between 10% and 25%, tariffs on autos from Europe and China-made autos from Mexico between 10% and 25% and tariffs on dairy imports from Canada, and electronics and chemicals from China. We assume retaliation in kind in the form of tariffs on US imports to these economies.
Given Trump is likely to use his executive authority under Sections 201, 232 and 301 of the International Emergency Economic Powers Act, we would expect a procedural lag from the announcement of the trade sanctions to their implementation of nine to 12 months. This would mean a gradual drag on growth starting in Q4 2025 that would cumulate to 0.6% of real GDP by the end of 2026.
In July, we stressed that steep tariff increases against China and other trading partners would likely lead to stagflation via a massive negative economic shock and a significant inflationary impulse, while also triggering financial market turbulences. We modeled a scenario factoring 60% tariffs on Chinese imports and a 10% universal tariff on all imports from US trading partners, assuming proportional retaliation against US exports.
The impact of these actions on the US economy would be significant, with US real GDP growth reduced by 2.5% after two years and the increased cost of imports adding 1.2% to consumer price inflation after one year. This would represent an average income loss of $1,145 per household, with lower-income families disproportionately affected. Households in the top income quintile stand to lose 0.7% of their real disposable income in this scenario; the burden for households in the bottom quintile would be more than twice as large at 1.6% of real disposable income.
At a global level, real GDP would be curbed by 1.5% after two years, with GDP in China reduced by more than 2% and GDP in Mexico and Canada reduced by 2.5%-3.0%.
We also anticipate Trump would use his executive authority to immediately restrict immigration at the southern border – requiring asylum seekers to stay in Mexico until they become eligible for entry and work authorization.
Our new baseline will factor a reduction in net migration from the current pace of around 1.1m per year to around 900k per year. Given the importance of immigration in driving labor force and employment gains over the last two years, these curbs would weigh on short-term growth as well as the economy’s potential growth rate.
We estimate a drag of 0.1% on GDP after a year. In addition, as we have previously stressed, immigration was an important driver of the labor market rebalancing, helping to ease excessive wage growth and inflation. Reduced immigration would therefore be expected to fuel renewed inflationary pressures.
Importantly, we do not assume mass deportations of individuals in the US illegally, nor severe restrictions on legal immigration. Both measures would represent a further downside risk to our baseline.
The federal deficit in fiscal year 2024 was $1.8t, equal to 6.4% of GDP, while the total US federal debt held by the public reached historically high levels just above 100% of GDP at the end of fiscal year 2024.
Under current law, the CBO estimates that 75% of the increase in deficits over the next decade will arise from greater interest payments on debt, with payments as a share of GDP reaching their highest level since 1940. Spending on interest payments is expected to approach total discretionary outlays in 10 years.
An extension of the TCJA would increase debt in FY 2035 by 11% to 14% of GDP, according to the Committee for a Responsible Federal Budget. This would bring the debt from 102% of GDP to around 130% in 2035, compared with 116% of GDP in the CBO baseline.
President-elect Trump's administration is set to continue its push for deregulation across various sectors and existing governmental agencies, aiming to lighten the regulatory load on both the economy and businesses. This effort is expected to be implemented through multiple channels, including executive orders and new rulemaking initiatives, although the impact of such efforts will vary widely. This could impact agencies such as the U.S. Securities and Exchange Commission (SEC) and the Federal Communications Commission (FCC).
Such deregulatory measures are likely to be beneficial for banks, the fossil fuel sector and real estate and could stimulate mergers and acquisitions deal activity. However, the inherent uncertainty that accompanies these regulatory changes could also pose risks, potentially unsettling markets and industry stakeholders.
Increased tariffs, reduced immigration and larger budget deficits will be inflationary. Our baseline CPI inflation outlook will be higher by 0.1% in early 2026 and 0.3% by late-2026, reflecting the combination of inflationary impulses from the above-stated policies as well as the offsetting disinflationary impulse from reduced economic activity due to tariffs and tighter monetary policy.
We stress that in contrast to Trump’s first term that featured low inflation and low interest rates, a rise in protectionism, curbs to immigration and larger budget deficits would come in a “new normal” paradigm defined by supply-side dynamics, a greater value of talent and structural upside risks to inflation.
While demand drivers dictated the pace of economic activity during the 1990-2020 period, supply conditions will play an increasingly important role in driving economic activity. In a world influenced by political and geopolitical factors, supply-driven risks to the inflation outlook appear tilted to the upside.
Indeed, while the global disinflation process will continue into 2025, structural factors will likely lead to inflation being a few tenths of a percentage point higher than central banks’ targets over the next five years. The “five Ds” of structurally higher inflation are demographics; debt; de-risking; decarbonization; and digitalization. Aging populations requiring more private and public spending; elevated levels of public spending for domestic and industrial policy; a growing focus on de-risking and building resilience in a geopolitically fragmented world; the greening of the global economy via greater outlays to reduce carbon emissions; and capital investment to develop generative artificial intelligence (GenAI) will likely push inflation structurally higher.
Ongoing disinflation and softening labor market momentum along with strong productivity growth should favor a gradual recalibration through the end of 2024. Following a 50bps cut in September and a 25bps cut at the November FOMC meeting, we anticipate another 25bps rate cut in December. In 2025, however, our new baseline will factor less Fed policy easing than previously anticipated due to expected higher inflation.
While we don’t believe the Fed will want to conduct monetary policy based on hypothetical trade, tax, immigration and regulatory policy shifts, we do believe there will be a bias towards more prudence. Using Fed Chair Jerome Powell’s analogy of navigating a dark room full of objects, the Fed is more likely to ease at every other meeting in 2025, for a total of 100bps of cuts in 2025. This contrasts with our pre-election outlook of rate cuts at every meeting through June 2025 and a total of 150bps of easing next year.
The Federal Reserve, as an independent institution tasked with a dual mandate of promoting maximum employment and stable prices, traditionally operates free from direct political influence.
However, it’s likely that the Trump administration may attempt to pressure the Fed to lower rates sooner, aligning with its pro-growth agenda. While the Fed makes decisions independently, the president may still seek ways to influence its direction, particularly by emphasizing the benefits of a looser monetary policy to stimulate economic activity.
The president's most direct avenue to influence monetary policy lies in appointing members to the Board of Governors as vacancies arise. Fed Governors serve 14-year terms, while the Fed Chair holds a renewable four-year term.
The next Fed Governor vacancy will not open until January 2026, when Adriana Kugler's term ends. Jerome Powell’s term as Fed Chair is set to expire in May 2026, but his term as a Governor extends until 2028. This timeline would give Trump the opportunity to nominate a new governor in early 2026 and appoint a new Chair in May 2026. Whether Powell chooses to stay on the FOMC as a Governor after his Chair term ends will determine if Trump could nominate an additional Board member.
Importantly, Fed Chair Powell recently stressed that he has no intention to resign or leave the Fed if president-elect Trump asks him to do so. Powell stressed that it’s “not permitted under the law” for the President to fire or demote the Fed Chair or any Governor at will.
It’s also essential to note that all presidential appointees to the Fed must secure Senate confirmation. While a Republican-controlled Senate would likely be receptive to Trump’s choices, confirmation is not guaranteed, as seen during his first term when some of his nominees were rejected even by a GOP-led Senate.
While the Trump campaign seemed to favor a weaker US dollar, it is unlikely the incoming administration would adopt unorthodox measures such as inbound capital controls to achieve their objective. What is more, Trump appears keen on defending the dollar’s status as the global reserve currency.
From a cyclical perspective, the US economic outperformance and more hawkish Fed relative to its peers is likely to favor a strong US dollar. Previous tariffs implemented by then-President Trump also coincided with a 9% appreciation in the broad trade-weighted US dollar. Researchers from the NBER estimated that around 22% of the US dollar appreciation and 65% of the renminbi depreciation observed in 2018-19 could be attributed to the tariffs implemented by the US.
Amid concerns that the dollar's dominance might be waning, it's important to recognize that such fears are often overstated. While other currencies may gain prominence, substantial evidence suggests that the dollar continues to maintain a significant role in global trade invoicing, capital markets, financial transactions and foreign exchange dealings.
Moreover, there are inherent strengths in the US financial system that help mitigate these concerns. US Treasury securities are widely regarded as a safe haven, consistently attracting strong demand. Furthermore, the United States benefits from being able to borrow in its own currency and from having a large, diverse economy that has demonstrated resilience over time.
The return of Donald Trump as president and likely Republican control of Congress could have a notable effect on the US economy, though policy priorities remain to be seen. The trade, tax and immigration policy mix could increase inflation and slow GDP growth, but the impact is likely to be seen in 2026-2027 rather than in the near term.
