Morgan Stanley Forecasts Interest Rate Rollercoaster If Trump Triumphs
In a recent report, Morgan Stanley projected a significant shift in interest rates if Donald Trump wins the upcoming presidential election. The 10-year Treasury yield currently stands at 4.49%, up from 3.9% on Dec. 29, reflecting the economic uncertainties ahead.
Economic Impacts of Trump’s Potential Victory
Joe Biden’s recent debate performance has heightened the chances of a Trump victory. This raises a crucial question for the economy and individual finances: What will happen to interest rates?
During Trump’s previous presidency (2017-2021), interest rates were low due to modest economic growth and minimal inflation. These rates stayed low into the first year of Biden’s administration but surged in March 2022 when the Federal Reserve increased rates to combat rising inflation.
Inflation was driven by supply-chain disruptions, significant government spending to counteract COVID-19 effects, and the Federal Reserve’s substantial money printing. Since halting rate hikes in July 2023, rates have fluctuated, with the 10-year Treasury note yielding 4.48% on Monday.
Current Economic Trends and Predictions
Now, with inflation and economic growth moderating, investors are questioning when the Fed will start cutting rates. The economy grew at an annualized rate of 1.4% in the first quarter, while the Personal Consumption Expenditures index, the Fed’s preferred inflation measure, rose by 2.6% over the past year. This is down from 2.7% in April, approaching the Fed’s 2% target.
The core PCE index, excluding food and energy, increased by 2.6% over the past year, the smallest rise since March 2021, down from 2.8% in April. These figures suggest the Fed might reduce rates this year, with a 63% chance of at least one cut by September and a 61% chance of two cuts by year-end, according to interest-rate futures.
Morgan Stanley’s Take on Trump’s Economic Impact
Morgan Stanley strategists believe a Trump victory could mean lower short-term rates and higher long-term rates, resulting in a steepening yield curve. This implies investors would benefit from buying short-term bonds and selling long-term bonds.
Economic growth might slow under Trump, prompting the Fed to cut short-term rates. Meanwhile, long-term rates could rise due to inflationary pressures.
Potential Effects of Trump’s Policies
Trump’s immigration policies could weaken the economy by limiting the workforce, while higher tariffs might increase production costs and inflation, pushing long-term rates up. Increased deficit spending could further elevate long-term rates due to more government bond issuance.
Morgan Stanley advises reducing equity holdings while increasing allocations to bonds and cash. Shorting bitcoin and betting on falling bond yields and a lower U.S. dollar against the Japanese yen are other recommended strategies.
Conclusion
As the U.S. approaches the presidential election, Morgan Stanley’s projections highlight the potential volatility in interest rates under a Trump administration. Investors and consumers alike should brace for possible economic shifts and prepare accordingly.
