What will happen to the economy if the next US president is Donald Trump? Christopher Hodge, Head US Economist at Natixis CIB, predicts that Trump will soon face the practical constraints of his role, especially given his concerns about potential negative reactions from financial markets. He will therefore not be able to implement many promises. In terms of US debt, both parties are behaving «highly irresponsibly».
This is an opportune moment for a European roadshow with a US economist. With the fiercely competitive US presidential and congressional elections just days away, tensions are high–not only in the US but also in Europe. Many European businesses, economists, and investors are closely watching the developments, as evidenced by a Deloitte survey of Swiss CFOs released on Thursday.
If the next president is Donald Trump, will he follow through on his threats of prohibitively high tariffs, thus dealing a severe blow to free world trade and globalization? Will he curtail the independence of the US Federal Reserve as threatened? Will he seek peace with Russia regardless of his allies, thereby jeopardizing the credibility of the USA as a protective power for a rules-based international order?
How Long Are US Treasuries to Be Considered Safe?
Both Trump’s and Kamala Harris's fiscal programs are expected to lead to larger deficits and further escalate the already substantial US debt. This raises the question of whether financial markets might eventually challenge the long-standing perception of US government securities as a safe benchmark in the global capital market—a shift that could trigger significant disruptions in the financial system.
Christopher Hodge, head US economist at Natixis CIB’s investment banking division since May 2023, acknowledges concerns about the elections but does not foresee such extreme scenarios unfolding. Speaking to finews.ch last week, Hodge shared his insights, grounded in a decade of experience with US monetary and fiscal policy from his roles at the Federal Reserve Bank of New York and the US Treasury, which lend his views considerable authority.
Many Powers, But Not So Much Means
Hodge is convinced that Trump barks more than he bites. Even in his first term as president, he did not pursue the policies he had previously announced in many areas. In addition, a president certainly has the authority to deport millions of people, for example, «but in practice, he doesn't have the necessary means to implement such decisions on his own.»
Trump will also quickly be confronted with reality when it comes to tariffs. «Tariffs on products such as coffee or bananas are absurd because the USA does not produce these goods itself. Moreover, higher tariffs inevitably increase inflation - and Trump knows exactly how unpopular this is.»
The Disciplining Power of the Factual
Hodge also assumes that no party will hold both the presidency and the majority in the Senate and House of Representatives after the elections, meaning that power will remain shared. «That would also be the best outcome for the stock market overall, as it would result in fewer changes.» However, a red wave (i.e. a Republican victory across the board) would give the stock market a short-term boost - and a blue wave (a Democratic victory, which Hodge considers unlikely) would weigh on the market.
Hodge trusts in the «disciplining power of the factual»—the constraints and realities that any president inevitably faces once in office—and believes that these realities will drive learning and adaptation. «Kamala Harris has no experience in the private sector and has shown that she is willing to change her policy views. She is now much more business-friendly than she used to be. And As vice president, she has also learned that not all government spending is popular, especially when it fuels inflation.»
US Debt: Critical From 2032
In Hodge's view, the US debt is a major problem, regardless of the outcome of the election. «Both parties are behaving highly irresponsibly in terms of fiscal policy.» This also has an impact on the market: «The demand for US government securities is high, but not infinite. If the Federal Reserve continues to reduce its Treasury holdings, the marginal buyers will be able to extract additional yield, adding to debt servicing costs.»
Things are likely to get really critical for public finances from 2032, when the Social Security Trust Fund is emptied. «Social benefits would then have to be massively cut, which would be a disaster for politics,» said Hodge. «The day when the US has to get its house in order will come, even if it is impossible to predict exactly when it will be.»
The Grab to Sanctions Erodes the Dollar’s Status
According to Hodge, one catalyst for this development could be the fact that the US has increasingly used the dollar as a «weapon» in the context of sanctions in recent years. Examples include the trade sanctions against China supported by both parties or the freezing of assets held by the Russian central bank at the New York Fed. Such measures could gradually erode the dollar's status as an international reserve currency—which would reduce demand for Treasuries.
Hodge is skeptical about Trump's future foreign policy. «Trump is a NATO skeptic and we don't know how to characterize his relationship with Vladimir Putin. However, both parties and the population stand by the Ukraine, and the hardline isolationists are a small minority in the USA.»
In addition, Trump's demand that the other NATO members make a greater contribution is in line with his predecessors, even if he presents it undiplomatically.
Geopolitics: Harris Would Rely More on Alliances and International Institutions
«Trump's behavior would be more difficult to predict for both allies and opponents. Harris would rely more on alliances and international institutions,» said Hodges. «Foreign policy is usually low on the list of priorities in Americans' voting decisions.»
Why Trump Will Not Interfere Monetary Policy Too Much
«Whether he can fire Jerome Powell is questionable,» said Hodge. «While he may choose not to re-nominate Powell in 2026, he’s unlikely to take actions too disruptive to Fed policy before then.»
But here, too, Trump is likely to encounter opposing forces: «There are institutional rules and principles, and if Trump overreaches, the markets would react. And we know how important a good US stock market is to him.»
Hodge also thinks that in the event of a red wave, the central bank could potentially lower interest rates somewhat less than in other scenarios (even if the president wants low interest rates) in order to compensate for the Republicans' inflationary economic policy.
