Trump, tariffs and election trade-offs

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Articles by Jamie

Jamie Dannhauser

Economist

5 September 2024

Inflation in the United States has fallen a long way from its peak of 9% in summer 2022. Favourable conditions have enabled the Federal Reserve (Fed) to nurse the economy back to health, and its vitals are in good order, with reasonable growth and tolerably low inflation.

Because of the substantial improvement in the inflation outlook, financial markets are expecting a series of interest rate cuts. The Fed has all but told investors this will begin at its September meeting. Several members of the Federal Open Market Committee (FOMC) fear policy is already far too restrictive; that may soon become the consensus view of the committee.

But there is discord in the current market setup. Bond markets are pricing an aggressive cutting cycle over the next couple of years. Equity markets, meanwhile, are buoyed by the sugar rush of lower front-end interest rates. Yet they expect rapid growth in corporate earnings, forecasting 9.4% EPS growth over the next 12 months for the median S&P 500 stock.¹ If the economy is strong enough to produce such profit growth, one wonders whether inflation will be sufficiently benign to permit the 150-200bps of rate cuts now expected by the end of 2025.

And this is without considering the policy platforms of the two candidates in November’s presidential election.

Joe Biden’s administration has been as hostile to China as the one that preceded it (even if the tone has been less inflammatory). Strategic rivalry with China – economic, technological, financial and geostrategic – is one of the few issues that commands bipartisan support, meaning Kamala Harris is unlikely to chart a different course. If Trump wins, Sino-US economic warfare could significantly intensify.

Neither Trump nor the broader Republican movement has laid out exact plans; but substantially higher tariffs on China look likely if Trump returns to the White House. The most vocal of Trump’s protectionist advisers have suggested across the board tariffs, on military foes and allies alike.

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The media are currently touting a 60% tariff on Chinese-made goods and 10% on goods from all other countries. As this month’s chart highlights, Trump implementing these tariffs would return the average rate to a level last seen in the 1930s.

Trump’s trade agenda faces considerable – but not insurmountable – political and legal hurdles. A second Trump administration may not be able to hike tariffs to the levels many people appear to anticipate. Even so, the risk of a trade war with China and other trading partners is material.

The inflationary dangers in 2025 and beyond are not limited to Trump’s trade agenda. A surge in immigration since the pandemic has helped tame inflationary pressures. A second Trump term could involve dramatically lower migrant flows, as well as intensified efforts to deport existing illegal migrants. Even under a Harris presidency, the threat of big losses in the midterm elections would exert considerable political pressure on the White House’s immigration policy.

If Trump does return to the Oval Office, the combination of sharply higher tariffs and squeezed immigration could reignite the inflationary dry tinder that remains in the US economy. And if the Democrats win, the toxic political atmosphere post-election may tie the hands of Kamala Harris, forcing her to pursue a different, but nonetheless inflationary, policy agenda.

Either outcome could bring the Fed’s cutting cycle to a premature end, dashing investors’ hopes of easier and more asset-friendly monetary conditions.

#inflation, #regime change

Articles by Jamie

Jamie Dannhauser

Economist

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Piers Wheeler

Director – Institutional

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Developing and executing asset management strategy for capital raising and strategic relationship management. Coverage includes EMEA, Asia and Australia. Piers joined Ruffer in 2021, having previously worked with asset management firms including Eastspring, AMP Capital and LEK as a strategic consultant. He holds a MA from the Bayes Business School and a BA (Hons) from the University of Oxford.

Annabel Paterson

Senior Associate – Institutional

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Joined Ruffer in 2021, having graduated with a first class honours degree in land economics from the University of Cambridge. After two years working with the UK Private Wealth team and completing her IMC and CFA Level I qualifications, she now supports Ruffer’s global business development and client servicing efforts.

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