According to Calenti, a former Federal Reserve Board staff member and adviser to several other central banks, there are three main themes that are set to hit major economies as a result of US President Donald Trump’s policies – not just the US, but Europe and the UK, too. Tariffs are very much front of mind, but there is also the fiscal stimulus that will be coming down the line during the year, together with the impact of the president’s immigration policies.
“We have just had the so-called Liberation Day of tariff announcements, though whether this could be a case of the US liberating itself from the international trading system remains to be seen. Also, it remains to be seen whether there are inflationary or possibly stagflationary outcomes, not just in the US, but elsewhere in the world,” Calenti says. “How other countries respond to these tariffs will also make a huge difference, particularly as goods re-route from the US to elsewhere.”
However, even though tariffs are top of the agenda, Calenti believes that the coming fiscal stimulus could have a significant impact too. “Where the Federal Reserve goes [on interest rates] will impact the swap market, and this may impact how treasurers fund and or hedge themselves globally.”
The stimulus relates in part to the Tax Cuts and Jobs Act, key provisions of which are set to expire at the end of 2025. With a Republican-led White House and Congress, policymakers are projected to preserve a majority of the TCJA provisions, but they will need to find a source of funding for the extensions. Calenti believes that the net tax proceeds from recent tariffs will disappoint, and the US will increase its borrowing. This should keep pressure on longer-end rates around the world.
“That’s $4.5 trillion of treasury issuance, and that’s a meaningful number on top of the $30 trillion that is already outstanding, and that is why longer-dated interest rates should reverse their tariff driven decline, absent a recession” says Calenti, adding that other countries, such as Germany, have already announced their stimulus packages, while the UK is increasing both spending and taxation.
Corporates are going to think twice about what they were planning to do, and they will need to make sure they have a plan B, which will become more important with all this noise
The third theme is immigration – Calenti believed at first that Trump’s immigration policies would be hard to implement, “but he has now put so many resources behind this” that these policies are now becoming a reality. “The first point is that those people who are not coming to the US may go elsewhere,” Calenti observes. “But, depending on how many people Trump is able to deport there may be wage implications in the US, which the Fed and the dollar will notice [via inflationary pressures]. Other central banks may have to react to this.”
As if that wasn’t enough for treasurers' plates, Calenti also points to the three ‘arrows’ of Treasury Secretary Scott Bessent – 3% growth in GDP from deregulation, cutting the budget deficit to 3% of GDP, and increasing oil production by 3m barrels a day. Calenti is sceptical that any of these three goals can be achieved.
All this, Calenti says, points to on-going volatility in the global markets. “President Joe Biden kept things relatively sleepy in the markets, but it’s harder to sleep well at night now that we are a tweet away from volatility. Treasurers will be hearing a lot of noise in the near term, but not a lot of signals.
“This will create uncertainty on whether to hedge/invest or not, as well as how and when. Corporates are going to think twice about what they were planning to do, and they will need to make sure they have a plan B, which will become more important with all this noise.”
Philip Smith is editor of The Treasurer
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