Since the beginning of the year, investor confidence that the U.S. economy will achieve a 'soft landing' has been growing. However, Trump's election as the next president complicates this outlook.

Some economists now believe that if Trump fulfills his key campaign promises, the U.S. may face another inflation surge.

‘The economy is landing softly,’ said Nobel laureate and Columbia University professor Joseph Stiglitz at Yahoo Finance's annual investment conference on Tuesday. ‘But that will end on January 20th of next year.’

Due to President-elect Trump’s campaign promises to impose high tariffs on imports, cut taxes for businesses, and limit immigration, people believe that Trump and his proposed policies could exacerbate inflation. These policies could also put pressure on the already inflated federal deficit, further complicating the Fed's future interest rate path.

‘The biggest risk is the imposition of high tariffs across the board, which could severely impact growth,’ Goldman Sachs chief economist Jan Hatzius wrote in a report to clients last Thursday.

Jennifer McKeown, chief global economist at Capital Economics, also acknowledged in a report this week that inflation poses 'upside risks,' 'partly stemming from tariffs and immigration policies proposed by Trump.'

Investors have already taken note of this.

Last Wednesday, the latest global fund manager survey from U.S. Bank highlighted increasing investor expectations for a 'no landing' scenario, where the economy continues to grow but inflation pressures persist, leading the Fed to adopt a longer duration and higher level of interest rate policy.

Post-election, investor expectations for the U.S. economy not landing have increased.

Inflation Spiral

Imposing tariffs has been one of the most closely watched promises during Trump's campaign. The elected president promised to levy comprehensive tariffs of at least 10% on all trading partners, including a 60% tariff on Chinese imports.

Stiglitz said, ‘This will lead to inflation. Then you will start to consider an inflation spiral. (That is to say,) when prices rise, workers will demand higher wages, and then you will start to think about what happens if others retaliate.’

Minneapolis Fed President Kashkari categorized possible retaliatory actions as a ‘tit-for-tat’ trade war, which would keep inflation elevated for a long time.

‘If inflation rises, Fed Chair Powell will raise interest rates,’ Stiglitz said. ‘If you combine higher rates with retaliations from other countries, you will see a global economic slowdown. Then the worst-case scenario will occur: inflation and economic growth stagnation or slowdown.’

Investors have lowered their expectations for interest rate cuts. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the market now expects only three rate cuts from the Federal Reserve from now until the end of next year.

Market expectations for Fed interest rate cuts are increasingly being reduced.

The Trump administration will bring about significant changes.

Despite facing high interest rates, the U.S. economy remains resilient. Retail sales in October exceeded expectations again, GDP remains strong, and the unemployment rate continues to hover around 4%, while inflation has slowed significantly.

Additionally, it is still unclear which policies will become priorities after Trump takes office or whether he will fully implement the campaign promises he made.

The only certainty is change. The Republican Party will control the White House and both chambers of Congress in 2025.

The U.S. Bank's U.S. economic team wrote in a client report last Friday, ‘A Republican landslide in the election could bring about a complete policy overhaul.’

The team stated, ‘In some reasonable scenarios, growth rates could exceed 3%, or the economy could enter a recession. Our baseline forecast is optimistic, but our confidence is weak. As next year's policy agenda becomes clearer, we will flexibly adjust our forecasts as needed.’

Article reposted from: Jinshi Data