Morgan Stanley analysts expressed concerns about the potential inflationary impact of Donald Trump’s victory in the upcoming presidential election and stated that the market has not fully digested the related risks.
The bank’s analysts detailed several key policies proposed by the Trump campaign that could lead to inflation. “The market seems to have not priced in the significant risk premium associated with the inflationary impact of Trump’s key policies,” the analysts pointed out.
Key policy objectives outlined by Morgan Stanley:
Extension of the 2017 tax cuts: Trump plans to extend the tax cuts implemented in 2017, which are set to expire at the end of 2025.
Strict immigration restrictions: Proposals to deport illegal immigrants born abroad could tighten the labor market, leading to wage pressure and exacerbating inflation.
Imposition of tariffs on imported products: Broad tariffs on imported products could lead to domestic price increases, further intensifying inflationary pressure.
Furthermore, Morgan Stanley experts stated that Trump plans to replace Federal Reserve Chairman Powell after the end of his term. While legislative reforms to reduce the independence of the Federal Reserve have been discussed, such reforms seem unlikely to pass through Congress even with Republican control. However, these remarks themselves could raise long-term inflation expectations and tighten the US government bond yield curve, putting pressure on the market.
In a recent note written before the debate, the conclusion drawn about Trump-Biden is that Trump’s policies could pose significant upward risks to inflation, inflation expectations, and US government bond issuance. These potential changes underscore the importance of closely monitoring the evolving political landscape and its impact on economic policy and market dynamics.