Donald Trump’s election win has cheered the global stock markets, with benchmark indices across the world gaining between 1.5 to 3 percent. The 47th President of the United States has stuck to his poll promise, which could unleash a wave of tariff hikes and a trade war between the US and China.
This could stoke up inflation to an unprecedented level and limit the scope for the Federal Reserve to cut interest rates. The US benchmark 10 year bond yield is up nearly 11 percent in less than a month in anticipation of a Trump victory.
The 10 year bond yield in the US witnessed its biggest monthly spike in October since September 2022. The interest rates in the US have already gone up by nearly 1 percent, and the Fed has a tight leash to walk.
On November 6, the 10 year yield spiked up by more than 3 percent as Trump delivered his late night victory speech in Florida and said he would stick to his promises. The US benchmark 10 year bond yield is a key indicator of interest rates.
Trump is expected to follow through on his campaign promise to deliver a statutory tariff rate of 60 percent against imports from China and broader 10 percent tariffs on other countries within weeks of his taking charge in January 2025.
This could hurt the global trade sentiments as the Communist regime in China retaliates. The imposition of 60 percent tariff on imports from China will likely spark economic growth but also widen the fiscal deficit and reignite inflation.
A Nomura client survey report notes that the negative impact on the federal funds rate from a second Trump presidency is expected by the end of 2025. Combative trade policy would likely weigh on economic activity, which is dovish.
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The Fed would engage in a less aggressive cutting cycle under a second Trump administration due to the inflationary nature of additional tariffs.
As the global stock markets continue to rally, the US Fed will be making its next decision on interest rates on Thursday. The market rally around the world has been in anticipation of interest rate cuts by central banks.
But with the changed scenario, the global central banks would take a cautious view on rate cuts now. The US Fed’s decision will be closely watched, and its impact on the global economy will be significant.
The Federal Reserve will reassess its monetary policy in light of the potential trade war and tariff hikes. They will determine the direction of the global economy based on their response.
In the short term, the market rally may continue, but the long-term implications of a trade war and tariff hikes could be severe. The US economy may suffer, and consumer price inflation may see a significant boost, affecting airport fares and other prices.
It is a significant challenge.