Donald Trump likes to use the stock market as a scoreboard. Interest rates will judge that.
Donald Trump famously helped measure the success of your time in office using the stock market.
But in the first year of his second term, Trump may have little control which is expected to be a key driver of the market next year: interest rates.
Since Trump was elected on November 5, the 10-year bond yield (^TNX) rose about 40 basis points as markets saw interest rate cuts by the Federal Reserve on fears that inflation would not fall quickly to the central bank’s 2% target.
At just shy of 4.8%, the yield is at its highest level since late April 2024 and above levels where strategists believe higher rates are weighing on investors’ willingness to buy stocks. Similar rate increases in April 2024 and autumn 2023 it coincided with some of the biggest stock market declines in the current bull market.
For example, the last time the 10-year index climbed close to 5% in the fall of 2023, the S&P 500 (^GSPC) fell for three consecutive monthswith the benchmark index falling as much as 10% during the period.
“The correlation between equity yields and bond yields has turned decisively into negative territory (yields rise, stocks fall and vice versa) — something we haven’t seen since last summer,” Morgan Stanley Chief Investment Officer Mike Wilson wrote in a Jan. 5 note to clients.
Given this correlation of falling stocks when exchange rates rise, Wilson argued that exchange rates “the most important variable to monitor in 2025.”
The problem for Trump is that the president-elect can’t do much to affect lower rates.
In fact, many of his policies, at least when discussed in public, have backfired. take market action seen on January 6for example. When Trump denied the Washington Post report that its tariff plans may not be as widespread as first thought, yields rose and reversed an earlier decline.
The key fear of many market participants is that tariffs could prove inflationary at a time when inflation is already struggling to fall toward the Fed’s 2% target. And the central bank has have already started discussing how Trump’s policy could influence the question of whether or not interest rates should be further reduced in 2025.
Almost all Federal Reserve officials agreed at their last meeting that “increased risks to the inflation outlook” were due in part to the “likely effects” of expected changes in trade and immigration policiesaccording to minute from the Fed meeting on December 18.
Fidelity Investments’ director of global macroeconomics, Jurrien Timmer, told Yahoo Finance that his “main fear” is that the “inflation genie is never quite put back in the bottle.”
