Morgan Stanley analysts expressed concerns about the potential inflationary impact of a Donald Trump victory in the upcoming presidential election, noting that the market has yet to fully digest the associated risks.
The bank’s analysts detailed several key policies proposed by Trump’s campaign that could lead to inflation. “The market appears to have not fully priced in the significant inflation risk from Trump’s proposed key policies,” the analysts pointed out.
Key policy objectives outlined by Morgan Stanley include:
– Extension of the 2017 tax cuts: Trump plans to extend the tax policies introduced in 2017, set to expire by the end of 2025.
– Stringent immigration restrictions: Proposals to deport illegally born foreign immigrants could tighten the labor market, increasing wage pressures and exacerbating inflation.
– Imposition of tariffs on imported products: Broad tariffs on imports could drive up domestic market prices, further intensifying inflationary pressures.
Additionally, Morgan Stanley experts noted Trump’s plan to replace Federal Reserve Chair Powell after his term ends. While legislative reforms to reduce the Fed’s independence have been discussed, they seem unlikely to pass Congress even if Republicans control it. However, such discussions could raise long-term inflation expectations and tighten the US yield curve, adding pressure to the markets.
In conclusion, Morgan Stanley suggests that Trump’s policies pose significant upward risks to inflation, inflation expectations, and US government bond issuance. These potential changes underscore the importance of closely monitoring evolving political landscapes and their impacts on economic policies and market dynamics.