A Wall Street firm differs from others in that it believes the incoming U.S. President Trump's commitment to the tariff proposal is serious. The firm now believes that U.S. consumer prices (CPI) may face a "permanent shock," and that the Fed will need to keep interest rates above normal levels.

BNP Paribas stated that it assumes Trump will implement most or all of his campaign promises regarding foreign, economic, and trade policies, including measures that may harm the U.S. economy, such as import tariffs.

In the past two weeks, U.S. stocks have surged to historical highs, with the Nasdaq closing above 20,000 points for the first time on Wednesday. Furthermore, federal funds futures traders expect the Federal Reserve to cut interest rates next week, and by the end of next year, the Fed may implement up to four more quarterly rate cuts of 25 basis points each.

As these dynamics unfold, many market participants still hope that Trump's tough rhetoric on tariffs is ultimately just a negotiation strategy.

According to a report released by BNP Paribas on Thursday (2025 Global Outlook), if Trump's words are taken literally, the U.S. economy, which was expected to achieve a soft landing in early 2025, could stagnate in 2026 due to the new president's tariffs and immigration policies, offsetting his measures to boost economic growth. The bank also expects market participants to begin estimating higher U.S. inflation rates and that the Fed will cut rates fewer times than currently expected.

According to BNP Paribas's report: "Some argue that Trump's policies (especially tariffs) will not lead to inflation for reasons such as (i) he will not implement these policies, (ii) the dollar will completely offset their impact, (iii) there will be no second-round effects. We believe this framework is misleading. We believe Trump will implement—if not all—most of the tariffs he has threatened."

BNP Paribas also stated: "We expect U.S. consumer price levels to be permanently impacted (by about 2 percentage points), while U.S. inflation will be temporarily affected. However, we do not expect inflation expectations to loosen. In other words, we believe that maintaining restrictive policies over a longer period will allow the Fed to control long-term inflation expectations."

Here are BNP Paribas's expectations for the coming year:

The expected tariffs from Trump could directly push consumer prices up by about 80 basis points. "However, we believe tariffs will not only affect inflation through rising prices of imported goods but will also have a second-round impact on overall price levels." BNP Paribas's model found that rising import prices would broadly transmit to other goods, services, and wages, amplified by short-term momentum.

Assuming the Federal Reserve cuts rates by 25 basis points next week, the upper limit of the Fed's main interest rate target for the entire year of 2025 should remain at 4.5%. The federal funds rate target is currently between 4.5% and 4.75%.

Yields on U.S. two-year, ten-year, and thirty-year Treasury bonds may reach 4.55%, 4.65%, and 4.8% respectively by the end of 2025, levels higher than what they may reach in the first quarter of next year.

The dollar has further room to rise against the Mexican peso and the Canadian dollar.

A stronger dollar and the Federal Reserve's inaction should suppress gold prices in the second half of 2025, although the metal will reach new highs in the early part of next year.

With the tariffs coming into effect, oil prices may face bearish pressure in the second half of 2025.

Last week, more signs indicated that U.S. inflation may be more difficult to handle than many had imagined. The year-on-year CPI for November slightly rebounded to 2.7%, up from 2.6% previously.

Article republished from: Jinshi Data