The Trump Team Selection: Updates and Changes
The Donald Trump tax cut during his first administration got the market all excited, rallying throughout 2017 and early 2018. But then, Volmageddon hit in February 2018, causing some chaos. This time around, everyone’s talking about extending some of those tax cut benefits. With our increased fiscal limitations (read: more debt and deficits), it’s hard to say if Congress will be as generous with more cuts. Only time will tell.
The appointment of Scott Bessent, a fiscal conservative, to lead the U.S. Treasury might bring some insight into how to smartly extend these cuts. Global capital markets seemed pretty pleased with the nomination based on the positive response on Monday morning.
Back in 2017, both the nominal gross domestic product (GDP) and the U.S. consumer price index (CPI) increased, likely thanks to the wealth effect giving things a little boost. Flash forward to 2024, and we’re seeing a strong wealth effect with falling inflation—a surprisingly bullish combo that not many saw coming. Now, 2025 is shaping up to be more like 2018 than the booming 2017.
The Federal Open Market Committee (FOMC) began raising rates in 2017 and 2018 to get things back to normal after the zero interest rate policy (ZIRP). They even started shrinking the balance sheet in 2018 to tighten things up even more. This time around, things are a bit different, and it won’t be as much of a challenge in 2025 as it was in 2018.
2018 was rough for the market—it had high hopes for those tax cuts well before they became law in December 2017. Now, in 2025, there aren’t any big new tax cuts like before, so the market rally is more of a continuation rather than something completely fresh.
During Trump’s first term, tariffs were a big deal. Studies have shown they hurt manufacturing jobs and drove up producer prices—bad news for economic growth and inflation. Weakness in the equity market in late 2018 made the FOMC pause rate hikes and eventually switch back to cutting rates in July 2019, with an increase in the balance sheet (more QE).
In short, financial conditions dictate what the FOMC does, so as long as things are easy, the market should hold steady. What could rock the boat this time? Well, “It’s the economy, stupid,” as the saying goes. GDP, inflation, and employment are all looking good heading into 2025. Unexpectedly high inflation and weak employment might rattle things, especially with those tariffs in the mix.
The market seems pretty pleased about Bessent’s nomination—it might mean a change in the aggressive tariff strategy Trump has been pushing. Keep an eye on the economy, and let’s see how things play out in 2025.
