Asia wrap: The inconvenient truth

The Federal Reserve is facing an inconvenient truth: the macro and fiscal policy landscapes have shifted so dramatically that the traditional, incremental approach to monetary policy may no longer cut it. With Donald Trump heading back to the White House, the stakes have never been higher, and the debate around "sticky higher" inflation or even outright reflation risks is no longer esoteric—it's front and center.

Wall Street consensus is already grappling with the reality of a "run-hot" economic strategy that Trump’s administration seems poised to embrace, pouring fiscal gasoline on an already exceptional U.S. economic fire. This isn’t just a question of inflation creeping up—the potential for policy-induced acceleration puts the Fed in a bind. Powell’s Federal Reserve, already cautious about pushing inflation down to its 2% target at the expense of job losses, might be up against a political machine unwilling to concede an inch on growth at all costs.

Trump has made it clear that he won’t tolerate rate hike headwinds against his economic agenda. If inflation starts to roar under his policies—whether driven by aggressive tariffs, a spike in infrastructure spending, or policies with echoes of Erdogan’s playbook—expect him to demand rate cuts, irrespective of the consequences. The Fed’s independence may legally protect Powell, but in this political climate, the unimaginable has a way of becoming reality.

The bond market isn’t waiting for this showdown to unfold. The term premium rebuild reflects the market’s recalibration of risk and acknowledges that neutral rates may be far higher than previously assumed—anywhere from 3.5% to 4.5%, or even beyond. It’s no longer a question of whether the Fed will adjust but how it can justify cutting rates when inflation is sticky and fiscal policy is throwing accelerants on the fire.

Controlling inflation was a campaign promise for Trump, but the irony is glaring. Policies like tariffs and restrictive immigration rules could create the very price pressures they aim to tame. Politically and economically, this puts his administration in a precarious position, where early missteps could ignite the inflationary tinderbox. If Powell resists calls for easing, the tension between fiscal policy and monetary strategy could escalate into a full-blown standoff, leaving the markets—and the Fed—caught in the crossfire.

The idea that fiscal policy will save the economy under the incoming administration feels like wishful thinking. Extending the 2017 tax cuts might sound like a win, but let’s face it—it’s old news and already baked into the economy. These cuts overwhelmingly benefit corporations and higher earners who are more likely to stash cash than spend it, leaving Main Street in the dust. Don’t expect much of a growth surge there.

Then there’s the tariff time bomb. Raising barriers on imports is essentially a stealth tax on American consumers, hitting wallets where it hurts while creating bottlenecks in supply chains. Lower-income households bear the brunt, while higher prices ripple through the economy. And let’s not ignore the looming wave of trade retaliation. Europe and China aren’t just sitting idly by; they’re gearing up for a fight, crafting retaliatory measures that could add even more friction to an already fragile system.

Meanwhile, confidence could take a nosedive as these policies take shape. Consumption taxes hit the hardest where spending drives growth, and the tariff wars will only deepen the uncertainty. Add a slowdown in government spending to the mix, and you’re left with an economic recipe for stagnation, or worse—a recession.

The bottom line? The economic outlook isn’t just murky—it’s downright stormy. This administration’s playbook looks less like a growth strategy and more like a blueprint for turbulence. Buckle up; the ride ahead is anything but smooth.