U.S. equities surged higher this week following Donald Trump’s decisive victory in the presidential election (see report). Longer-term Treasury yields also shot higher, but later retraced all of Wednesday’s Trump trade as the Federal Reserve helped to calm the bond market by delivering on a quarter-point rate cut. The S&P 500 ended the week 4% higher and is now up an impressive 25% year-to-date. Meanwhile, the 10-year Treasury yield is looking to the end week slightly lower at 4.32% but is up nearly 60 basis points (bps) over the past month. (Chart 1). 

Beyond winning the White House, the Republicans also took control of Senate, securing 53 of the 100 seats as of writing. Two races are still too close to call, so there’s potential for the GOP’s majority to widen a bit more once all the ballots are counted. Meanwhile, control for the House of Representatives remains up in the air, with 25 seats still to be called. At this point, odds heavily favor the Republicans maintaining control of the House, but it’s unclear whether the GOP will be able to make further inroads relative to their current slim majority of four. If the GOP retains only a slim majority in the House, President Trump will need near-unanimous GOP support to pass legislation, which could present some challenge to his agenda. 

One thing is for certain under Trump 2.0: tariffs are coming. Once sworn in on January 20th, we expect Trump to use executive powers to act quickly and levy sweeping tariffs on many of the U.S.’s trading partners. China is at the top of the list, but history has shown that Trump isn’t afraid to raise tariffs on allies. While it is possible that Canada and Mexico receive some carve-outs, it would likely be conditional on them following the U.S.’s lead and leveraging similar tariffs on China. Others may also negotiate concessions, but that isn’t likely to happen until after the tariffs are in play.  

No matter which way you slice it, the more protectionist trade measures will be inflationary and work against the Federal Reserve’s objective of restoring 2% inflation. At the press conference, Chair Powell acknowledged this point, but also noted that the Fed doesn’t adjust its policy rate to potential changes in fiscal or other government policies. For now, the FOMC remains highly data dependent. This puts next week’s inflation report in focus, particularly after the September reading came in hotter than expected. With the economic data still strong, any further signs of stickiness on the inflation front will likely push Fed officials away from continued quarter-point cuts and towards a slower rate cut trajectory. 

At this point, we still feel that a December rate cut is still likely. However, we’ve revised our forecast for next year, reflecting the fact that tariffs (and the potential for tax cuts) will result in more persistent inflationary pressures. We now assume the Fed takes a more gradual approach in reducing the policy rate in 2025, cutting at every-other meeting, resulting in a total of 100 bps of easing by year-end (Chart 2).