The Federal Reserve should be cautious, as Trump's tariff policy may have a "permanent impact" on CPI!
BNP Paribas stated that Trump's tariff policies, the Fed's inaction, and the strength of the US dollar are likely to suppress gold prices in the second half of 2025.
A Wall Street firm, unlike others, believes in the commitments of the incoming US President Trump regarding tariff proposals. The firm now believes that US Consumer Price Index (CPI) may face 'permanent shocks', prompting the Fed to keep interest rates above normal levels.
BNP Paribas stated that it assumes Trump will implement 'most or all of his campaign promises on diplomacy, the economy, and trade, including measures that could harm the US economy, such as import tariffs'.
In the past two weeks, the US stock market has soared to historic highs, with the Nasdaq closing above 20,000 points for the first time on Wednesday. In addition, Federal Fund futures traders expect the Fed to cut interest rates next week, and by the end of next year, the Fed may make as many as four 25-point rate cuts each quarter.
During these developments, many market participants still hope that Trump's tough talk on tariffs will ultimately be just a negotiating strategy.
According to the "Global Outlook 2025" report released by BNP Paribas on Thursday, if Trump's words are taken literally, the originally expected soft landing of the US economy in early 2025 may be stalled by the new president's tariff and immigration policies until 2026, offsetting his measures to promote economic growth. The bank also expects market participants to begin estimating higher US inflation rates, and the number of Fed rate cuts to be less than currently expected.
According to BNP Paribas' report: "Some argue that Trump's policies (especially tariffs) will not lead to inflation, on the grounds that (i) he will not implement these policies, (ii) the dollar will fully offset their impact, and (iii) there will be no second-round effects. We believe this framework is misleading. We believe Trump will implement - even if not all - a large part of the tariffs he has threatened."
BNP Paribas also stated: "We expect that US consumer price levels will receive a permanent impact (about 2 percentage points), while US inflation will be temporarily affected. However, we expect inflation expectations not to loosen. In other words, we believe that by maintaining restrictive policies for a longer period, the Fed can control long-term inflation expectations."
The following is BNP Paribas' outlook for the next year:
Trump's anticipated tariffs could directly raise consumer prices by about 80 points. "However, we believe that tariffs will not only impact inflation through higher import prices, but will also have a second-round impact on overall price levels." BNP Paribas' model found that the increase in import prices will be widely transmitted to other goods, services, and wages, and amplified by short-term momentum.
Assuming the Fed cuts rates by 25 points next week, the upper limit of the Fed's main interest rate target for the whole of 2025 should remain at 4.5%. The federal fund rate target is currently between 4.5% and 4.75%.
The yields of US two-year, ten-year, and thirty-year government bonds may reach 4.55%, 4.65%, and 4.8% respectively by the end of 2025, levels higher than where they may reach in the first quarter of next year.
There is further upside potential for the US dollar against the Mexican Peso and the Canadian Dollar.
A stronger US dollar and the Fed's inactivity should suppress Gold prices in the second half of 2025, although the metal is expected to reach new highs in the early part of next year.
With the tariffs taking effect, Crude Oil prices may face downward pressure in the second half of 2025.
More signs last week indicate that the US inflation may be harder to handle than many have imagined. The year-on-year CPI for November slightly increased to 2.7%, higher than the previous value of 2.6%.
A Wall Street firm, unlike others, believes in the commitments of the incoming US President Trump regarding tariff proposals. The firm now believes that US Consumer Price Index (CPI) may face 'permanent shocks', prompting the Fed to keep interest rates above normal levels.
BNP Paribas stated that it assumes Trump will implement 'most or all of his campaign promises on diplomacy, the economy, and trade, including measures that could harm the US economy, such as import tariffs'.
In the past two weeks, the US stock market has soared to historic highs, with the Nasdaq closing above 20,000 points for the first time on Wednesday. In addition, Federal Fund futures traders expect the Fed to cut interest rates next week, and by the end of next year, the Fed may make as many as four 25-point rate cuts each quarter.
During these developments, many market participants still hope that Trump's tough talk on tariffs will ultimately be just a negotiating strategy.
According to the "Global Outlook 2025" report released by BNP Paribas on Thursday, if Trump's words are taken literally, the originally expected soft landing of the US economy in early 2025 may be stalled by the new president's tariff and immigration policies until 2026, offsetting his measures to promote economic growth. The bank also expects market participants to begin estimating higher US inflation rates, and the number of Fed rate cuts to be less than currently expected.
According to BNP Paribas' report: "Some argue that Trump's policies (especially tariffs) will not lead to inflation, on the grounds that (i) he will not implement these policies, (ii) the dollar will fully offset their impact, and (iii) there will be no second-round effects. We believe this framework is misleading. We believe Trump will implement - even if not all - a large part of the tariffs he has threatened."
BNP Paribas also stated: "We expect that US consumer price levels will receive a permanent impact (about 2 percentage points), while US inflation will be temporarily affected. However, we expect inflation expectations not to loosen. In other words, we believe that by maintaining restrictive policies for a longer period, the Fed can control long-term inflation expectations."
The following is BNP Paribas' outlook for the next year:
Trump's anticipated tariffs could directly raise consumer prices by about 80 points. "However, we believe that tariffs will not only impact inflation through higher import prices, but will also have a second-round impact on overall price levels." BNP Paribas' model found that the increase in import prices will be widely transmitted to other goods, services, and wages, and amplified by short-term momentum.
Assuming the Fed cuts rates by 25 points next week, the upper limit of the Fed's main interest rate target for the whole of 2025 should remain at 4.5%. The federal fund rate target is currently between 4.5% and 4.75%.
The yields of US two-year, ten-year, and thirty-year government bonds may reach 4.55%, 4.65%, and 4.8% respectively by the end of 2025, levels higher than where they may reach in the first quarter of next year.
There is further upside potential for the US dollar against the Mexican Peso and the Canadian Dollar.
A stronger US dollar and the Fed's inactivity should suppress Gold prices in the second half of 2025, although the metal is expected to reach new highs in the early part of next year.
With the tariffs taking effect, Crude Oil prices may face downward pressure in the second half of 2025.
More signs last week indicate that the US inflation may be harder to handle than many have imagined. The year-on-year CPI for November slightly increased to 2.7%, higher than the previous value of 2.6%.
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