Trump's Victory Will Challenge Fed's Rate-Cut Path as More Tax Cuts Are Coming

As Donald Trump approaches his second term as U.S. president, traders believe the yield curve will be steeper, posing a challenge for the Fed's current rate-cutting path, which will be crucial for a steep yield curve.

The 10-year Treasury yield jumped 13 basis points to trade at 4.418%, hitting its highest level since July 2, as investors bet that a Trump presidency would increase economic growth and fiscal spending.

Trump led Vice President Kamala Harris 266-188 in the electoral college, according to CNN. The former president has already won the swing states of North Carolina, Georgia, and Pennsylvania. He just needs 4 more votes to win the presidency. Additionally, Republicans are expected to regain their majority control of the U.S. Senate in 2025. The House remains uncertain, leaving the possibility of a Republican sweep.

The consensus is that bond yields could jump after Trump takes office, and even more aggressively in a Republican sweep since no one can stop Trump from imposing more tax cuts and tariffs, widening the fiscal deficit and inflation. To moderate inflation, the Fed will have to tighten policy as it did during the 2016-2020 period.

"If there's a Republican sweep of the House, Senate, and the presidency, I expect the bond market to be wobbly," Jeremy Siegel, finance professor at the Wharton School of the University of Pennsylvania, said on Tuesday. "I expect them to be worried that Trump would enact all those tax cuts, and I think bond yields would rise."

Neither Trump nor Harris has really promised fiscal discipline on the campaign trail, raising worries that investors will demand higher yields in exchange for holding Treasuries, as the government is forced to issue more and more debt to fund its ballooning spending.

The yield is expected to approach 4.5% in the event of a Trump win, according to Stephanie Roth, chief economist at Wolfe Research.

This poses a challenge for the Fed's current easing policy. The Fed is expected to cut rates on Thursday, following a 50 basis point cut in September. Traders have slashed the overall rate cut to 100 basis points for next year by September.