A Wall Street firm differs from others in that it believes President-elect Trump is committed to the proposed tariffs. The firm now believes that U.S. consumer prices (CPI) may experience a "permanent shock," and 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 could harm the U.S. economy, such as import tariffs."

In the past two weeks, U.S. stocks have soared to historic highs, with the Nasdaq closing above 20,000 points for the first time on Wednesday. Additionally, federal funds futures traders expect the Federal Reserve to cut interest rates next week, with the possibility of up to four more 25 basis point cuts by the end of next year.

As these dynamics unfolded, many market participants still hoped that Trump's tough rhetoric on tariffs would ultimately just be a negotiation tactic.

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

According to BNP Paribas's report: "Some argue that Trump's policies (particularly tariffs) will not lead to inflation, on the grounds that (i) he will not implement these policies, (ii) the dollar will fully offset their effects, (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 that U.S. consumer price levels will experience a permanent shock (about 2 percentage points), while U.S. inflation will be temporarily affected. But we expect inflation expectations will not ease. In other words, we believe that by maintaining a restrictive policy over a longer period, the Fed can control long-term inflation expectations."

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

The expected tariffs from Trump may directly raise consumer prices by about 80 basis points. "However, we believe that tariffs will not only affect inflation through rising prices of imported goods but will also have a second-round effect 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%.

The yields on U.S. two-year, ten-year, and thirty-year Treasury bonds are expected to reach 4.55%, 4.65%, and 4.8%, respectively, by the end of 2025, levels that are higher than those they may reach in the first quarter of next year.

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

A stronger dollar and the Federal Reserve's inaction are expected to 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, crude 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 tackle than many had imagined. The year-on-year CPI for November slightly rebounded to 2.7%, up from a previous value of 2.6%.

Article republished from: Jin Shi Data