The Fed's efforts to fight inflation over the past two years are likely to be "wasted" by the US election.
As supply chain problems are resolved and the Fed continues to raise interest rates, US inflation is steadily declining. In September, the year-on-year increase in CPI has fallen to 2.4%, close to the level before the epidemic.
But whether inflation will continue to ease next year depends largely on the results of the November election. If inflation rises again, the Fed will be forced to abandon its current rate cut strategy and start raising interest rates again.
Immigration, tariffs, and deficits are all big troubles
Legendary investor Paul Tudor Jones previously warned in an interview with the media that whether Trump or Harris won the presidential election, US inflation would rise-both presidential candidates have made "crazy" promises of tax cuts and increased fiscal spending, but turned a blind eye to the US deficit problem.
Nick Timiraos, a well-known financial journalist known as the "New Fed News Agency", said in an article on October 28 that economists are generally more worried about Trump than Harris. His propositions on trade and immigration policies are most worried by the market, and in related areas, the president has greater freedom of action without seeking congressional approval.
In terms of immigration, a study by the Peterson Institute estimates that the deportation of illegal immigrants (Trump's core proposition) will greatly reduce economic output while pushing up inflation. Due to the reduction in the labor force, companies either raise wages and prices or accept lower profit margins.
And the deportation of immigrants may not achieve Trump's policy goal of transferring local jobs from foreigners to Americans.
A study by the University of Colorado Denver shows that for every 1 million illegal immigrants deported, 88,000 American workers lose their jobs. This is mainly because immigrant workers in certain industries, including food processing, agriculture, construction and the hotel industry, are not necessarily competing with American workers.
If existing workers are expelled, these companies may scale back production rather than hiring more local workers. The reduction in sales, in turn, leads to a reduction in high-paying jobs for local workers, which serve these industries.
The market is relatively consistent in its views on the policy consequences of Trump's tariffs. Business leaders and economists agree that American consumers will bear the cost of tariffs.
Philip Daniele, CEO of the American auto parts chain AutoZone, made it clear in last month's earnings call that "these tariff costs will be passed on to consumers."
The deficit issue is also a focus of market attention. In terms of taxation, Trump currently hopes to extend parts of the 2017 tax cut bill that will expire after 2025, while further reducing corporate tax rates. He also proposed to eliminate taxes on worker tips, overtime pay and retirees' Social Security benefits.
This makes fiscal spending balance a big problem that needs to be solved urgently. Paul Tudor Jones warned that if the next president does not adjust policies to reduce the deficit to cope with the rising debt-to-GDP ratio in the United States:
The solution to get out of this situation is inflation.
The Fed may stop cutting interest rates and raise interest rates again
For the Fed, the situation will be very tricky no matter who is elected. Timiraos warned that any policy that pushes inflation up again may cause the Fed to slow down or even stop its interest rate cut plan.
Timiraos believes that for the Fed, tariffs are similar to tax increases and will weaken demand. During Trump's last term, tariff increases disrupted the stock market and threatened corporate investment. When the negative impact of tariffs on economic growth exceeded the impact of inflation, the Fed finally lowered interest rates.
But this time it may not be the same. If tariffs trigger inflation to rise again, it will be hard for the Fed to sit on the sidelines. Historically, the Fed has missed a good opportunity to fight inflation by misjudging the price increase at the time in 2021 as "temporary".
Timiraos warned that once price pressures spread, the Fed would raise interest rates sharply to ensure that businesses and workers do not expect high prices to become the new normal. If a second round of inflation occurs soon after the first round, the adjustment will be more difficult.
All roads lead to inflation? Long gold, short US bonds
Paul Tudor Jones believes that if his forecast for the US inflation outlook comes true, the US bond market will inevitably face a shock, and gold and Bitcoin may become the big winners:
All roads lead to inflation. I'm bullish on gold, I'm bullish on Bitcoin, I think commodities are severely undervalued, so I'm bullish on commodities. I think a lot of young people are looking for inflation hedges through Nasdaq, which is also doing well.
Jones warned that the next president must address the problem of huge deficits or face protests from the bond market. "Bond activists" already made a big fuss about this last year, refusing to buy US bonds, causing the 10-year Treasury yield to hit 5% in October last year:
If the next president does not adjust policy to deal with the rising US debt-to-GDP ratio, the solution out of this situation is inflation.