Trump wants to run the economy hot to out of debt.
So, what are the implications for markets?
The Trump administration’s plan for the next 12 months could look like the following:
1) More tariffs: threaten big tariffs by Aug 1st, and ‘’close deals’’ with higher tariff rates before that hence increasing your effective tariff rate and your $$$ inflows through customs;
2) More fiscal: use the start of FY2026 (October) to propose another tax bill, and make it ‘’look like’’ budget neutral with the help of new estimated tariff revenues;
3) Lower front-end : keep attacking the Fed and signal to markets the new Fed Chair is coming and he will be as dovish as you can picture.
Basically, you run the economy hot.
Real growth remains ok as the tariff pass-through hits , but rounds of fiscal stimulus preserve real purchasing power for consumer and capex for companies. It’s not skyrocketing, but it’s fine.
Nominal growth is more robust in the 4-5% area as remains sticky due to tariffs and fiscal.
And you focus on short-term debt issuance to keep interest on debt contained.
The ‘’Run It Hot’’ policy is nothing new: the US applied it in 2003-2006 and in 2013-2019 to make sure the economy could recover from the 2001 and GFC crisis.
But there is a big difference today.
The two prior ’’Run It Hot’’ experiments were run with:
- Inflation at or below target
- No tariffs,
- No attacks on the Fed independence
- No hostile policymaking against the rest of the world
This time, the long-end of the US bond market could revolt for real.
What do you think could be the market implications of the ’’Run It Hot’’ policy this time around?
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