Following Trump’s win, equity markets saw a brief improvement from the settled uncertainty of his upcoming presidency. However, this sentiment did not last as questions came up about what to expect from his proposed protectionist trade policies, deregulation, and tax cuts.The possibility of increased interest rate uncertainty during the second Trump term is due to the following:

1. US debt levels and sovereign bond rates: Trump policies, such as additional spending or tax cuts, can have a negative impact on US federal budget deficits. With US debt already at record levels, there is a tail risk of markets losing faith in the US Government to repay debt (à la France in recent months), which could lead to steep increases in (long-term) US rates.
2. Inflationary pressure: tariffs on imports would put additional upward pressure on short-term US inflation rates. This inflationary pressure could lead to increased federal spending to compensate consumers. Tariffs can also slow (general) economic growth around the world, which in itself could put negative pressure on US budget deficits.
3. A Federal Reserve balancing act: as the Fed might face contradictory economic developments, it will make it difficult for markets to predict whether the federal funds rate will go up or down. There might be increased pressure by President Trump on the Fed to lower rates to stimulate growth and lower government borrowing costs. Despite 10-Year US treasury yield the precedence in recent decades for the Fed’s independence from political demands, such pressure could pose problems as it historically did between President Ronald Reagan and Chair Paul Volker.

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