Our new ‘Trump 2.0’ base case envisages the incoming president following through on a pared-back version of his campaign pledges across fiscal, trade, immigration and regulatory policy. 

We expect some loosening in fiscal policy, large tariff increases on China but a case-by-case approach elsewhere, increased deportations and looser regulation.

Our new forecasts therefore see inflation treading water at uncomfortably firm rates, while the Fed will cut rates more gradually and to a higher terminal rate in coming years.

But we have also sketched out a ‘Trump unleashed’ scenario, which envisages more aggressive policy changes facilitated by a supportive Congress. 

Large tax cuts and higher defence spending in this scenario push the deficit much wider, despite larger and broader tariff increases. Deportations rise significantly, generating a sharp labour force shock.

These policies would drive a reacceleration in inflation and make it hard for the Fed to cut at all, causing the president to threaten the central bank’s independence.

Finally, we’ve specified a ‘Trump delivers for markets’ scenario, in which the president focusses on the market friendly aspects of his agenda. 

This would involve a more measured tax bill, smaller tariff increases, less aggressive immigration policy, and a supply-side boost from deregulation. These policies would boost growth while still allowing inflation to normalise and interest rates to come down.
 
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