Republican candidate Donald Trump secured the necessary 270 electoral votes to win the presidential race, achieving a decisive victory over his Democratic rival, Kamala Harris. Control of the House of Representatives remains uncertain, but with Republicans taking 52 of the 100 seats, they will now represent the majority in the Senate. Following the election results, global market participants began assessing the "Trump 2.0" scenario, with a general consensus that Trump would be much more effective in achieving his objectives compared to his previous term.
On Wednesday, as early election results indicated Trump’s lead, the so-called “Trump trade” began to shake financial markets. As traders prepared for Trump’s return, U.S. Treasury yields jumped approximately 20 basis points, stock indices reached all-time highs, and the dollar recorded its largest gain since 2020. The sharp movement in Treasury yields reflects increased inflation expectations and concerns that his tax and tariff policies will increase the budget deficit, thereby stimulating bond issuance. Meanwhile, precious metals lost appeal as rising yields increased their opportunity cost and as risk appetite surged.
On Wednesday, around 19 billion shares were traded on U.S. exchanges, marking a 63% increase from the daily average over the past three months. The S&P 500 index rose by 2.5%, marking the best post-election day in history. The Nasdaq 100 index also closed at an all-time high after climbing 2.7%. The gains in U.S. equities reflect expectations that Trump’s tax cuts and a policy agenda with less regulation could boost corporate profits.
On the other hand, Trump’s decisive victory and the strengthening dollar have put some foreign officials on alert to protect their currencies and economic stability. Japanese and Indonesian policymakers issued statements indicating that they are prepared to take measures to support the value of their currencies. European Central Bank Vice President Luis de Guindos, meanwhile, stated that if Trump implements the tariffs he has committed to, the world could face shocks in growth and inflation. Guindos guaranteed that a tariff rate of 60% specifically on China would have massive direct and indirect impacts on global trade.
Trump’s pledged policies carry two main risks. The first is the risk of slowing global economic growth, and the second is the risk of domestic inflation, which could restrict the Federal Reserve’s capacity for rate cuts. Such a scenario would mean that other central banks have less room for rate cuts precisely when they might need it, as their currencies weaken and economic growth comes under pressure.
High inflation and elevated Treasury yields in the U.S. are encouraging capital to exit emerging markets. This trend triggers a depreciation of emerging market currencies against the dollar, disrupting both financial and price stability. As global policymakers brace for Trump’s second term, they have already started evaluating how upcoming policies could impact their economies.
Trump's Win Adds Complexity to Fed’s Rate Strategy: Slower Moves on the Horizon?
Before the election, data from the U.S. indicated that the economy was on a path to a soft landing. While the labor market continued to cool moderately, inflation was moving toward the Fed's 2% target without triggering a sharp rise in unemployment. However, the Fed’s policy path now seems more complicated.
During the campaign, the new president pledged to increase import taxes while reducing taxes on everything from corporate profits to overtime pay—policies that most economists view as inflationary. Given the Fed’s heightened sensitivity to price pressures and inflation expectations in the post-pandemic era, speculation is rising that the Fed may slow or pause rate cuts if signs of accelerating inflation appear.
Futures market data indicates a 97.4% probability of a quarter-point cut at the Fed’s meeting tomorrow, which would bring rates down to a target range of 4.5%-4.75%. Markets are also expecting another quarter-point cut in the final meeting of the year. However, next year, the Fed may need to reassess its policy path, and rates may not decline as much as previously anticipated.
JPMorgan Chase & Co. revised its rate forecasts on Wednesday, indicating that policy uncertainty could lead the Fed to proceed more cautiously than usual. While the bank still expects quarter-point cuts in both tomorrow's and December's meetings, it now anticipates fewer cuts in 2025. Previously forecasting a rate drop to 3% by 2025, the bank now expects cuts to halt once rates reach 3.5%.
Trump’s new presidential term begins on January 20, but it’s unclear which of his proposed policies will be enacted or when. As a result, with policy uncertainty looming, the Fed is likely to proceed more cautiously in its next steps, making its decisions in upcoming meetings harder to predict.
The Fed will announce its interest rate decision early tomorrow, followed by a press conference with Chair Jerome Powell. This meeting, occurring soon after the victory of a candidate who argued that the president should influence rate decisions, holds added significance for markets. Likely to face questions about how Trump’s policies could impact the economic and inflation outlook, Powell is expected to maintain an apolitical stance. Nonetheless, he must also strike a reassuring tone to instill confidence in global markets regarding his ability to manage the effects of a second Trump term.