Short-term stability, long-term risk: The potential impact of Trump's policies

The Federal Open Market Committee (FOMC) recently announced another 25 basis point rate cut, adjusting the Fed funds rate target range to 4.5% ~ 4.75%. This is the second rate cut in the year and is in line with widespread market expectations. The FOMC noted that the election outcome would not affect its decisions in the short term, and stressed that the policy stance would shift to neutral over time, meaning the pace of future rate cuts could slow.

According to recent data, the US inflation rate has gradually fallen from a peak of 9.1% in mid-2022 to around 4%. This trend has given the market some confidence, indicating that the Fed has made some progress in dealing with inflationary pressures. However, the interest rate cut is not only to lower borrowing costs, but also to stimulate economic growth in response to a possible economic slowdown.

A drop in interest rates often has a positive effect on the stock market. According to historical data, U.S. stocks have risen about 8% on average in the six months since 2000 after each Fed cut interest rates. The S&P 500 immediately rose 1.5% following the release of the rate cut, indicating a positive attitude of the market towards lower borrowing costs. In the short term, such policies may encourage businesses to increase investment, further stimulating consumer spending, thereby boosting economic growth.

In the short term, the market is likely to remain relatively stable due to the dual effects of falling interest rates and falling inflation. Some economists predict that as interest rates fall, consumer borrowing costs will fall, prompting more households and businesses to spend, boosting economic growth. In addition, the unemployment rate remained relatively low (around 3.8%), supporting the economy's steady growth.

However, while the market outlook may seem optimistic in the short term, the hidden long-term risks cannot be ignored. A closed policy towards foreign trade could have far-reaching effects on the economy, especially in the event that Trump might come to the table again.

Trump's trade war and tariff policies during his tenure have had a significant impact on the US economy. According to studies by economists, tariff policies directly increase the price of imported goods, thereby affecting the Consumer Price Index (CPI). For example, tariff policies since 2018 have caused prices for some goods to rise by about 20%, according to data from the U.S. Chamber of Commerce. This will put pressure directly on household spending and may spark new inflation.

If Trump is elected again and continues to pursue this protectionist policy, there will be increased pressure on the supply chain, further pushing up prices. In the future, this could cause inflation to rise again, forcing the Fed to take drastic interest rate hikes. Looking back in history, the Federal Reserve raised interest rates to 20 percent in the 1980s to counter inflationary pressures at the time. If the economic situation worsens, the market may again experience a sharp change in interest rates, which will have a profound impact on investors and the economy as a whole.

The economic environment of the 1980s provided important lessons for today's policymakers. At the time, the US economy was suffering from extremely high inflation and the Federal Reserve was forced to adopt a drastic policy of raising interest rates in order to stabilize prices and restore market confidence. This move, while helping to reduce inflation in the short term, dealt a severe blow to economic growth, leading to the recession of 1981 to 1982.

In the current economic environment, if inflation rises again due to trade policy, the Fed could face a similar predicament again. While prices can be controlled in the short term by raising interest rates to counter inflation, it can slow economic growth and even trigger a recession in the long run.

While the recent drop in interest rates has helped keep the market steady in the short term, risks to the future remain. Trump's closed-door policy of foreign trade could cause inflation to rise, eventually forcing the Fed to take drastic interest rate hikes. The process could echo the lessons of history from the 1980s and have a profound impact on the US economy and markets. Short-term stability does not mean long-term security, and market participants need to keep a close eye on upcoming economic policy changes and their potential consequences.

Traders at The Trader Funds