Author: Luke, Mars Finance
The boom is over, and the shadow of recession looms
At the beginning of 2025, the US financial market went from enthusiasm to anxiety. When Trump won the election last November, investors set off a wave of "Trump trading", looking forward to his tax cuts and deregulation policies to continue the economic prosperity, and the stock market rose accordingly. However, this optimism quickly faded, replaced by concerns about the "Trump recession".
The Nasdaq index suffered its biggest one-day drop since September 2022, technology stocks and bank stocks plummeted for days, and consumers' willingness to spend shrank at the fastest rate in four years. Agence France-Presse bluntly stated that the "honeymoon period" between the financial market and Trump is over. JPMorgan Chase raised the probability of a recession this year from 30% to 40%, Goldman Sachs adjusted it from 15% to 20%, and Polymarket's probability of a US recession in 2025 also reached 40%.
The market began to question: Are Trump's policies pushing the US economy into the abyss? In this storm, everyone is asking: When will the Fed cut interest rates to pause this storm?
Tariffs and layoffs: The trigger for a recession?
Less than two months after taking office, Trump's policies have already caused a stir. He has once again adopted the tariff weapon, proposing a 10% to 25% tax increase plan on Canada, Mexico, the European Union and even China in an attempt to reverse the trade imbalance and stimulate the return of manufacturing.
At the same time, Musk's "Government Efficiency Department" cut federal employees, announcing 172,000 layoffs in February alone, the highest since 2009, and the total number may exceed 100,000 in the future. These measures have made the market uneasy: corporate costs have risen, price pressures have emerged, and consumer confidence has been shaky.
The Atlanta Fed predicts that GDP growth will slow in the first quarter. Historical patterns show that since 1980, when the Fed raises interest rates to above 5%, a crisis always occurs within 2 to 4 years. Now is the risk window after the 2022 interest rate hike.
Trump said on March 9: "This is a transition period, and we are doing big things." However, Nomura Securities strategists believe that he may be intentionally creating a recession to slow economic growth and promote deflation. Barclays' latest forecast also reflects this trend, predicting that the Federal Reserve will cut interest rates by 25 basis points in June and September respectively. Compared with the previous expectation of only one rate cut in June, the adjustment may be due to deeper concerns about inflation and economic slowdown.
Debt pressure and the Fed's game
Trump's policy may be aimed at a deeper goal. The U.S. federal debt has reached 36 trillion U.S. dollars, and interest payments have become a fiscal burden. According to the Congressional Budget Office, interest costs will reach 952 billion U.S. dollars in fiscal year 2025, and may soar to 1.8 trillion U.S. dollars in 10 years. If the Federal Reserve cuts interest rates by 100 basis points, the government can save 300 billion to 400 billion U.S. dollars in interest each year, which is an irresistible temptation for Trump.
He threatened to replace Fed Chairman Powell, and Musk also appeared with him at the White House on March 11, announcing layoffs and criticizing monetary policy. Treasury Secretary Bessant said the economy needs to be "detoxified" and get rid of its dependence on government spending, which seems to be paving the way for short-term pain.
Currently, the federal funds rate remains at 4.25%-4.5%. Powell said at the beginning of this month that inflation (CPI of about 3%) has not yet dropped to 2%, and the economy is still resilient, so there is no need to rush to cut interest rates. However, cracks have appeared in the labor market, and the total number of layoffs doubled in February. If the unemployment rate rises from 4% to 5%, the Fed may be forced to take action. The market speculates that June may be the starting point for the interest rate cut, and Barclays' forecast further strengthens this expectation, believing that the September interest rate cut is a follow-up response to the economic slowdown.
The cost of transformation and unknown risks
Trump's ambitions may go far beyond the present. His economic adviser Stephen Milan proposed that the United States needs to reshape the dollar system and get rid of the deficit burden of the reserve currency. He envisions that through the "Mar-a-Lago Agreement", China and the European Union will be forced to sell off their dollar assets and turn to long-term bonds, thereby devaluing the dollar and stimulating the return of manufacturing. If this plan comes true, it will reshape the global trade pattern, but the premise is that the economy must first be "detoxified" - actively bursting the bubble and reducing leverage.
On March 11, Trump told hundreds of business executives: "We have to rebuild our country." However, this transformation will be costly: a falling stock market, a weaker dollar, and even a short-term recession may be inevitable.
Harvard economist Lawrence Summers warned that the probability of recession is nearly 50% and inflation may return to its 2021 high; British analyst Dario Perkins pointed out that a real recession is not a "purifier" but may leave lasting trauma. If it gets out of control, the Republican Party's prospects in the 2026 midterm elections will be overshadowed. From the "Trump deal" to the "Trump recession", the Fed's decision is crucial - whether the June and September rate cuts predicted by Barclays can be achieved depends on the evolution of inflation and employment data, and the success or failure of this gamble is still unknown.
