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U.S. policies are set for a major reshaping as full Republican control takes hold in 2025. To navigate the investment opportunities and challenges ahead, we explore how key policy changes may impact economic growth, inflation, corporate earnings, and interest rates.Ultimately, we believe the major initiatives investors should watch closely are in areas such as tariffs, immigration, taxes, and deregulation, as these policies take center stage and shape the economic landscape.These policies are likely to be:

This is a live document that we will update as policies and priorities become clearer in the months ahead.

Trade policy
Key takeaways

Tariffs: How much higher?At times, President-elect Trump has proposed a 60% tariff rate on all imports from China and a 20% tariff rate on all other U.S. trading partners. Taken literally, these steps would lift the effective tariff rate in the United States by 15 ppt (orange dot)—a historically large increase that significantly exceeds the trade restrictions from his first term.
KEY WATCHPOINT: How aggressively President-elect Trump follows through on his tariff proposals into 2025 and beyond.First, during Trump’s first term, the administration did not deliver the full extent of tariffs that were discussed on the campaign trail, suggesting that significant weight should be placed on the idea that tariff threats were used as a tool for negotiating trade deals, and U.S. trading partners were willing to seek deals to avoid damaging their economies.
Second, President-elect Trump championed the strength of the economy and stock market during his first term, and an aggressive trade war that risked both would conflict with some of his past priorities. As such, we expect a more measured strategy moving forward (green dot above).
Impact of tariffs on inflationTariffs can impact inflation through a range of channels including:

Bringing it all together, our baseline for trade policy lifts the year-ago core PCE inflation rate by roughly 0.3 ppt in 2026 (green vs. blue lines below).
Economic growth consequences of tariffsNobel Prize-winning economist Paul Krugman famously noted “the dirty little secret of international trade economics is that moderate tariff rates don’t have huge growth effects.” This is especially relevant considering that the United States is a relatively closed economy with the import share of core personal consumption expenditures standing at only 10%.

On balance, we estimate a modest drag of a few tenths of a percentage point on real GDP growth in 2026. Note: the high-end tariff scenario could be worse than what is shown in the chart if trade policy uncertainty increases well beyond what is currently observed in the data.
Below shows how we’re tracking trade policy uncertainty and financial conditions. Trade policy uncertainty increased markedly through the end of October. Meanwhile, financial conditions eased following the U.S. election with Fed cuts, higher equity prices and tight credit spreads more than offsetting dollar strength and higher long-term interest rates. For now, these drivers are offsetting one another for the growth outlook.
How tariffs can affect earningsEquity analysts² have estimated that every 5-ppt increase in the effective tariff rate could pose a headwind of 1 to 2 ppt to S&P 500 earnings growth. We estimate a 1-ppt hit to earnings from trade policy.Impact on earnings

Source: IBES Datastream, Russell Investments. Nov. 11, 2024.
What the influence could be on Fed policyTariffs are a stagflationary impulse—generating both weaker growth and more inflation—and a complicated issue for central bankers. But given economists widely believe that tariffs only lead to a one-time (transitory) increase in the price level, Fed doctrine would be to focus on risks to growth and the business cycle. Put differently, tariffs are likely to create a dovish impact on policy rates.Supporting this idea: during the last expansion, the Fed cut rates for the first time in July of 2019—with Chair Jerome Powell noting the cut was “intended to insure against downside risks from weak global growth and trade policy uncertainty.”
Watchpoints

Fiscal policy
Key takeaways

What new fiscal policies can we expect from a second Trump administration?It’s widely expected that President-elect Trump and the Republicans will extend measures from the Tax Cut and Jobs Act that were set to expire at the end of 2025. Most of these provisions were for households, including cuts to marginal income tax rates.
Extending these TCJA provisions does nothing to economic growth or inflation. Households already benefit from them as current policy now. However, the moves would pressure the long-term fiscal trajectory of the United States. Most agencies—like the CBO—forecast deficits assuming policy evolves as legislated. If all TCJA provisions were instead extended, the deficit is projected to be $7.4 trillion larger through 2034—adding roughly 10 ppt to the national debt as a share of GDP.Beyond the TCJA, President-elect Trump has talked about using tariff revenue to pay for an expansionary fiscal program. His fiscal plan is likely to evolve but currently has three pillars:

Can these proposals pass through a Republican-controlled Congress?

Cutting the corporate tax rate from 21% to 15% would provide an almost 1:1 boost to S&P 500 earnings growth.

Source: IBES Datastream, Russell Investments. Nov. 11, 2024.From an economic perspective, corporate tax cuts would have negligible, positive effects on growth and inflation.³ an expansionary fiscal policy would be hawkish for Fed policy particularly given the economy is already strong.Longer-term interest rates increased notably in advance of the red wave outcome, with higher term premia driving most of the increase since early September.
Could bond yields and term premia rise even further if fiscal sustainability, inflation risks, or Fed independence are challenged in the years ahead? Term premia now range between 50 and 100 bps on 10-year Treasuries and are approaching their highest levels in the post-Global Financial Crisis (GFC) period. However, past periods of elevated inflation risk (the early 1980s) or challenges to Fed Independence (the early 1970s) saw investors demand even higher risk premia for holding long bonds.Into these risks, our fixed income strategy team judges duration exposure would look more attractive if the 10-year Treasury yield moved up to between 4.6%-4.8%.Watchpoints:

Immigration
Key takeaways

The immigration policy agendaPresident-elect Trump is likely to take executive action to limit immigration flows. We expect the contribution from immigration to U.S. population growth to rapidly downshift to levels not seen since the first Trump administration.For context, during 2017-2019, immigration added 0.2% to U.S. population growth. But immigration has been 4-5 times stronger in recent years (blue bars). As immigration downshifts, the pace of potential (non-inflationary) economic growth is likely to slow from around 2.5% to 2%. Most economists already incorporated this change into their forecasts as both Democrats and Republicans proposed reforms on the campaign trail. Less labor supply could pose upside risks to inflation. But two important points cut against this. First, the U.S. labor market is not overheated right now. Second, if aggregate demand slows on the back of immigration restrictions, this would offset the impact of wages onto price inflation.Interestingly, high -frequency data suggests that over half of the expected stepdown in immigration flows has already occurred. Larger demographic impacts are possible. The second item on President-elect Trump’s campaign platform⁴ calls for the U.S. “to carry out the largest deportation operation in American history”. If, for example, a million individuals were deported, the direct contribution from immigration to population growth would change from +0.2 ppt (blue bar, chart above) to -0.1 ppt. And a Peterson Institute working paper found that if all of the estimated 8 million unauthorized workers in the United States were deported, it could push U.S. GDP 6 ppts below baseline into the mid-2030s.Watchpoints

Deregulation
Key takeaways

The president’s power to appoint heads of executive agencies is granted by Article II of the Constitution. This grants the president considerable control over the regulatory agenda and how strictly agencies enforce current law.Two sectors have received the most attention for deregulation in a second Trump administration:Energy:

Financials:

A few other observations:

The percent of small businesses citing government red tape as the single most important problem declined markedly in the first Trump administration.
And, according to the George Washington University (GWU) Regulatory Studies Center, President-elect Trump put in place 40% fewer economically significant rules by year three of his first term in the White House than current U.S. President Joe Biden did.
Watchpoints:

¹ Macro theory suggests tariffs reduce demand for foreign goods (and foreign currencies), thereby strengthening the currency of the country imposing tariffs (U.S. dollar)² See, for example, “US Weekly Kickstart: Looking back on 3Q results and forward to potential effects from tax and tariffs under a Trump presidency.” Goldman Sachs. Published November 8th, 2024.³ See, for example, “Comparing Fiscal Multipliers” published by the Committee for a Responsible Federal Budget in October 2020. The fiscal multiplier on corporate tax cuts is estimated to be very small – at between 0x and 0.4x. Cutting the corporate rate is estimated to be worth $700bn over 10 years or 0.2% of GDP. At a 0-0.4x fiscal multiplier that would imply a 0 to 0.08% boost to real GDP growth.⁴ Source: https://www.donaldjtrump.com/platform⁵ See, for example, https://www.mcglinchey.com/insights/trump-2-0-potential-cfpb-changes-in-2025/⁶ See, for example, “21st Century Monetary Policy” by Ben Bernanke (2022).More By This Author:Key Takeaways From October’s U.S. Inflation Reports
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