[Trump Again] Accelerating Large-Scale Tax Cuts and Spending 'Mega Bill'... Delaying Interest Rate Cuts

Corporate Tax Rate Cut from 21% to 15%
Top Income Tax Rate Lowered to 37%
Fiscal Deficit Hits Record $1.8 Trillion
Worse Expected This Year, Treasury Issuance to Rise
Fed Likely to Maintain High Benchmark Rate
Trump Wants Lower Rates
Clash with Fed May Reoccur

"We want one big and beautiful bill."

Donald Trump, the President-elect of the United States, recently requested Congress to pass a large-scale spending bill all at once instead of passing individual bills multiple times. The "mega bill," which contains the core policies of the second Trump administration, is interpreted as a "preview" indicating that the Federal Reserve (Fed), the U.S. central bank, is likely to significantly retreat from its stance of lowering benchmark interest rates. This analysis is based on the idea that if the Trump administration fulfills its promises such as tax cuts and illegal immigration control through large-scale fiscal spending, inflation could ignite, weakening the Fed's justification for cutting interest rates.

Trump Announces Large-Scale Tax Cuts

According to major foreign media, Trump is expected to begin large-scale tax cuts immediately after taking office. He plans to reduce the top corporate tax rate from the current 21% to 15%, the top income tax rate from 39.6% to 37%, and exempt overtime pay, Social Security benefits, and tips from taxation. The Trump administration faces the challenge of expanding spending while cutting taxes.

The problem is the serious fiscal deficit in the United States. According to the U.S. Treasury Department, the fiscal deficit for the 2024 fiscal year (October 2023 to September 2024) reached $1.833 trillion (approximately 2,500 trillion KRW), marking the largest deficit ever recorded except for the COVID-19 pandemic years of 2020 and 2021. The fiscal deficit for the first quarter of the 2025 fiscal year (September to December 2024) was $711 billion, a 39% increase compared to the same period last year. This strengthens the expectation that the fiscal deficit will worsen this year.

Because of this, there is analysis that the Trump administration will issue a large amount of government bonds. The British weekly magazine The Economist predicts that the U.S. Treasury will issue $2 trillion in government bonds this year. This corresponds to about 7% of the U.S. Gross Domestic Product (GDP) and 6% of the total U.S. government bond market.

Will Inflation Ignite and the Interest Rate Cut Trend Retreat?

Trump's threat to impose universal tariffs and his immigrant deportation policies raise concerns about inflation. The reduction in immigrant labor, which provides low-wage labor, and supply chain disruptions caused by tariffs could lead to a general increase in final product prices.

While the benchmark interest rate has fallen by a total of 1 percentage point since September last year, the U.S. 10-year Treasury yield, a market interest rate benchmark, has risen by more than 1 percentage point from 3.6% in September last year. On the 14th, it temporarily rose to 4.8%, marking the highest level since October 2023. There are also views that the 10-year Treasury yield could surpass 5% this year and that this level could become the 'new normal.'

As the fiscal deficit expands and inflationary pressures increase, the Fed will have a greater need to maintain high benchmark interest rates. Last month, the Fed's new dot plot forecasted a total 0.5 percentage point cut in interest rates this year, in two increments of 0.2 percentage points each. Goldman Sachs and BNP Paribas have predicted that if inflation is not controlled this year, the Fed may not cut interest rates even once. Bank of America (BoA) has suggested that if the U.S. core Consumer Price Index (CPI) remains above 3% this year, the possibility of interest rate hikes should also be considered.

Will Trump Struggle with the Fed in His Second Term?

Trump wants the central bank to maintain low interest rates. However, if the Fed maintains high rates due to worsening inflation, there are concerns that friction between the Fed, independent from the president and administration, could reoccur as it did during Trump's first term. Jerome Powell, Fed Chair whose term expires in June 2026, clashed with Trump in 2018, the second year of Trump's first administration. At that time, the Fed raised benchmark interest rates by 0.25 percentage points each in March, June, and September 2018 to prevent economic overheating. If the rate hikes led to a visible economic slowdown, it could negatively affect Trump's 2020 reelection bid. Trump publicly criticized Powell via social media. Nevertheless, the Fed under Powell raised rates again by 0.25 percentage points in December of that year, ignoring the criticism.

Former Fed Chair Ben Bernanke emphasized the Fed's independence at an annual conference held in San Francisco on the 4th. He pointed out, "If the Fed's independence is compromised in conducting monetary policy, it could negatively impact inflation and the market."

Strong Dollar Trend Continues Amid U.S. First Policy

The 'King Dollar' phenomenon, driven by the U.S.'s America First policy, is expected to continue. The Dollar Index, which measures the value of the dollar against six major currencies, surpassed 110 on the 13th. This is the fourth time since the Dollar Index was introduced in 1973 that it has exceeded 110. Goldman Sachs expects the dollar's value to rise more than 5% by the end of this year.

However, Trump is a 'dollar weakener.' He has expressed the view that a strong dollar harms U.S. export companies. Some speculate that Trump might pursue a 'Second Plaza Accord.' The Plaza Accord in 1985 was an agreement where the U.S. sought to reduce its trade deficit by depreciating the dollar and appreciating the Japanese yen and German mark. However, a weaker dollar could lead to higher import prices, exacerbating inflation concerns.