Synopsis:

Nomura anticipates that the Fed will respond cautiously to a Trump administration focused on tariffs and tax policies, which could be inflationary and growth-dampening. The Fed is expected to make two more cuts this year, with only one cut in 2025, followed by a pause and gradual easing in 2026.

Key Points:

• Economic Policy Focus: Nomura expects Trump’s second term to prioritize tariffs and tax policies, which could increase inflation and reduce growth.
• Fed Rate Cut Path: Nomura now expects the FOMC to ease twice more this year, followed by just one cut in 2025. Nomura then expect a prolonged pause, followed by 50bp of cuts in mid-2026.
• Raised Terminal Rate: Nomura has raised its terminal rate forecast to 3.625% (from 3.125%) due to anticipated inflationary pressures from tariffs.

Conclusion:

Nomura expects a cautious Fed response under a second Trump administration, with gradual cuts as the FOMC navigates inflationary pressures from tariffs. The updated terminal rate reflects a cautious stance, balancing inflation risks with the potential for slower growth.