Wall Street’s been banking on steady rate cuts through 2025, but Donald Trump’s tariff-happy and tax-cutting plans could throw a wrench in that fantasy, leaving the Fed chair with no choice but to keep his finger on the “hold” button for longer.
Trump’s tariff tornado
Why? Trump’s promises are a perfect recipe for inflation 2.0. Here’s the deal: he’s talking big tariffs (China, brace yourself) and a potential 10% tax on all imports. That’s like tossing gas on the inflation bonfire.
More pricey imports mean the Fed can’t exactly chill, likely pausing any rate cuts for a while. Add with Trump’s tax cuts pumping extra cash into pockets, you’ve got a spending spree that will mess with the Fed’s 2% target.
The Fed’s stuck between a rock and a hard place: ease up and risk higher inflation; or keep rates high and crush Wall Street’s hopes and dreams for a rally.
Nomura economists are already predicting just one rate cut in 2025 – way less than the two or three the Street hoped for.
Let him cook?
And if Trump ramps up his criticism of the Fed again, it’s going to add a fresh dose of political heat to an already tough job: managing inflation without crashing the economy.
We’ve seen this movie before. In his first term, Trump and the Fed were like oil and water. Trump wanted growth and low rates, but the Fed – led by Chair Jerome Powell – held the line, raising rates to prevent the economy from overheating.
Here’s why that matters: High rates put a ceiling on stock gains and make bonds less appealing. Investors banking on quick rate relief might have to brace for a “higher-for-longer” scenario.
That means you should:
- Expect a strong dollar and soft gold prices for now. But once inflation picks up, gold could surge as the go-to hedge.
- Small caps and growth stocks will take a hit – high rates make borrowing pricey. Mega caps, with their massive cash piles, are safer bets.
So, if history’s any guide, Trump’s policy moves could clash with the Fed’s inflation mission all over again, leaving Wall Street right in the line of fire.
