Trump Tail Risks

Trade

• Starting with trade, however, Trump’s aggressive stance on the matter has become clear already. However, tariffs thus far appear to have been used simply as a ‘bullying’ tactic, being imposed, and then reversed, in relatively short order, once Trump has won concessions from the other party involved, to further his own political aims. See Colombia, Mexico, and Canada for evidence of this tactic in action.
• The bigger risk for market participants is when tariffs shift from being a stick with which to beat other nations with over various political issues, to being a measure that Trump uses in order to reduce what he views as ‘unfair’ trade deficits.
• This is likely to come into greater focus from April, when the Administration’s review into US trade policy is set to report, and provide recommendations. It is this juncture when the most significant tariff risk presents itself, with punitive and substantial tariffs likely to be levied on those blocs with which the US runs the biggest deficits – namely, China, and the European Union. The probability of a ‘universal’ tariff on US imports also remains elevated.
• Naturally, said measures pose two further questions. Firstly, what retaliatory measures those targeted by trade levies may implement? Secondly, and perhaps more importantly, what Trump may do if, as is probable, the tariffs which have been imposed do little to narrow the aforementioned trade deficits?
• The risks of a prolonged, escalating, tit-for-tat trade war, which ultimately would likely prove a zero-sum game, remain underpriced in financial markets, particularly as volatility remains subdued, while participants also assign much too low a probability to the likelihood of RoW recessions this year.

Geopolitics

• Away from trade, Trump operates in the geopolitical sphere with a mindset that seemingly has no ‘red lines’, and no ‘limits’ on either the rhetoric, or the actions, that the US may use. Consequently, geopolitical uncertainty will continue to ratchet higher, while conflict risk is likely to increase, further raising cross-asset volatility.
• Tariffs will not solve either live, or potential, conflicts, which require a more nuanced approach to be brought to a resolution. While the ‘madman theory’ suggests that Trump’s unpredictability could go some way to bringing conflicts to an end, this very same degree of unpredictability means that the potential for miscalculation, and subsequent escalation, is likely just as high.
• Once again, markets do not appear to have priced this risk, especially not the risk of fresh tensions flaring up, particularly in the South China Sea, even if the pivotal nature of Taiwan’s semiconductor manufacturing would suggest that maintaining the fragile status quo would be the more rational course of action.

Debt

• There is also the matter of debt, on numerous fronts.
• Perhaps the biggest concern is the potential for Trump to weaponize Treasuries. While such a concept might seem far-fetched, the US has increasingly flexed its financial muscle, and the might of the USD, in recent times – first via sanctions, then via the seizure of Russian FX reserves at the beginning of the war in Ukraine.
• While such a policy would amount to ‘shooting oneself in the foot’, and erode credibility to an unbelievable degree, it is not inconceivable to think that Trump may at least suggest that the US may refuse to pay interest on Treasury holdings to those countries it is in dispute with, either over trade, or other matters.
• Closer to home, the issue of debt could also be weaponised on Capitol Hill, as the US approaches the debt limit once more. While, as always tends to be the case, the debt ceiling is near-certain to be raised in due course, it seems plausible that Trump will take the issue to the wire, extracting as many concessions as possible from lawmakers in Congress to further his agenda. The same, equally, applies to a potential government shutdown, with funding currently set to expire in mid-March.

Immigration

• Immigration is another significant macro risk under the new Administration, as Trump cracks down particularly on undocumented migrants within the US, having already signed a raft of executive orders on the matter.
• In fact, this may be a more pertinent upside inflation risk than the potential imposition of tariffs, given that a significant reason why the resilient nature of the US labour market this cycle, and solid monthly pace of job gains, has not resulted in significant upward pressure on either earnings, or inflation.
• The removal of a significant number of migrants would, in turn, significantly reduce the size of the labour force, thus resulting in a mechanical tightening in employment conditions, in turn likely increasing upward earnings pressures, and potentially posing upside inflation risks as a result.
• Of course, the precise impact of these policies will be difficult to measure, and perhaps impossible for policymakers to model, though the FOMC appear increasingly likely to err on the side of caution for the time being, standing pat unless and until “real” progress is made in inflation returning to the 2% target. A tighter labour market would only serve to prolong the current pause in the easing cycle, further weakening the ‘Fed put’, whose strike price is already considerably lower than in 2024.

Monetary Policy

• Already, two weeks in, Trump has made numerous murmurings reiterating his long-standing view that interest rates should be lower, while also bemoaning the “terrible job” that the FOMC have done this cycle. Setting aside the fact that Powell has been an incredibly pragmatic Fed Chair, and unequivocally shepherded the US economy well in recent years, Trump’s attacks on the Fed are unlikely to stop any time soon.
• Predictably, and correctly, Powell has done his best to stress the Fed’s operational independence, while reiterating that he shan’t comment on the President’s policy views, nor will he resign if he were to be asked.
• In truth, Trump’s influence on monetary policy is a story for 2026. That year, not only does Powell’s term as Chair come to a close, but Trump will also have the opportunity to fill a spot on the Board vacated by Governor Kugler. While appointments to both positions require Senate confirmation, lawmakers have thus far shown little inclination not to confirm appointments which Trump sends their way.
• In the meantime, however, the volume of verbal attacks on the FOMC, and on Chair Powell, show no sign of stopping, and instead are only likely to increase in both frequency and ferocity, particularly if policymakers were to take a prolonged pause in the easing cycle. While explicit and aggressive action to force Powell out seems unlikely, it would be folly for participants not to at least be cognisant of the potential risk associated with such an eventuality.