This could mean a 'red wave' for the U.S. economy

First, things are not turning out the way you thought, and second, that's what some people were thinking when they first saw the stock ticker this morning. Financial markets, in particular, have anticipated Donald Trump's return to the White House. But only a few realized that the Senate would also tilt toward Republicans and that a majority in Congress was now within reach.

But what does this “red wave” mean for the U.S. economy and global trade? First, Trump will have more opportunities to thrive than he would with a divided Congress. His planned tax breaks will be given almost free rein, and his customs ideas will advance more unhindered.

Jürgen Molnar, capital markets strategist at RoboMarkets, believes that although Trump announced a “golden age” for the United States in his first speech, the management of many exporters in Europe and China Layers may not be so optimistic about future trade relations with the largest economy.

Economic Policy Concepts and Their Consequences

The common denominator in Trump’s economic policies is his preference for tariffs—which he sees as a panacea. However, Commerzbank expert Bernd Weidensteiner said there were definitely problems in assessing the economic consequences of his ideas overall, as they were sometimes contradictory during the campaign.

The common denominator in Trump’s economic policies is his preference for tariffs—which he sees as a panacea.Picture: AP CHINATOPIX

In addition, Weidensteiner said that some measures in Trump's plan, especially in the field of foreign trade, are likely to cause a backlash. Some projects may “fail to engage with political reality.” Therefore, it is difficult to reliably estimate the net impact of planning steps.

However, if Trump implements his tariff ideas, the average U.S. tariff rate will rise to its highest level since the 1930s. China is particularly likely to be targeted. Weidensteiner believes many of Trump's aggressive demands may be negotiating tactics that could lead to compromises with some trading partners.

Future tax cuts?

In terms of domestic policy, extending tax cuts is one of Trump’s priorities. Weidensteiner said the measures would be costly and could push up the U.S. deficit. After all, a debt limit increase due in early January could be completed quickly and under full Republican control, ING added.

However, experts at ING believe the U.S. economy will face headwinds “after a period of rising risk appetite,” noting that the U.S. government's borrowing costs are likely to increase in the medium term.

Katja Gisler, investment strategist and co-CEO of Wellershoff & Partners, also expects the U.S. budget deficit to increase significantly. “Since Trump is also likely to experience a recession while in office, the budget deficit could even get out of control,” she explained to AWP.

So there's a real risk that political stock exchanges won't actually be shorting certain markets this time around.Image source: AP dapd

In addition to runaway deficits, Giesler sees dangers from erosion of U.S. institutions and stubbornly high inflation, which could push interest rates higher in the short term. “It’s also unlikely to be helpful for the stock market,” the expert said. So there’s a real risk that political stock exchanges won’t actually go short on certain markets this time around.

Inflation risks and looming Fed conflict

Commerzbank's Weidensteiner sees the most obvious impact of Trump's plan on inflation. “If he actually imposed a 60% tariff on imports from China and a 10% tariff on all other imports, both effects could result in a 1% increase in prices,” he calculated. Potential deportations of immigrants who often work in labor-intensive industries could also push up wages.

Imminent policy changes will also put the Fed in a difficult position. Coba experts predict that interest rate cuts tomorrow, Thursday, and possibly even December will be relatively safe. By the spring at the latest, when the implementation of the tariff plan becomes apparent, the Fed's decision-making environment will change significantly.

LBBW also sees the future of Fed Chairman Jerome Powell as uncertain. He is likely to react uneasily to the election results as Donald Trump threatens to replace him.

LBBW also sees the future of Fed Chairman Jerome Powell as uncertain.Image: trapezoid

Even before the election, several economists highlighted the differences between Trump's growth plans and the price stability desired by the Fed. However, they believe Trump will not proactively attack the Fed chairman, but instead blame him for possible adverse developments in the economy. In addition, Trump can only remove Fed Chairman Powell after his term expires in May 2026. (Standards Development Bureau/Africa Working Group)

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