SINOLINK SECURITIES: The Three Gray Rhinos Facing the U.S. Economy in the Second Half of the Year

According to the Zhitong Finance APP, SINOLINK SECURITIES released a research report stating that the U.S. economy still faces gray rhino risks. After the implementation of the Inflation Reduction Act, the new fiscal increment in the U.S. is limited, and future fiscal spending will focus more on subtraction, with the source of reduced spending being the undeniable deficit issue. In addition, Trump's approach to tariffs and reshaping international relations has become more "radical and pragmatic," and the vulnerability of TACO may lead to increased backlash risks; within the Federal Reserve, the confrontation between the old and new Fed chairs has caused confusion, with the shadow Fed chair possibly holding "market pricing power." However, whether it is the shadow Fed chair or a more radical approach to seize control of monetary policy from Powell, the impact on the U.S. could be as significant as Liberation Day 1.0, or even more severe.

The main points of SINOLINK SECURITIES are as follows:

The rapid passage of the Inflation Reduction Act has allowed Trump to leave a dazzling political achievement on July 4th, reflecting his stronger control over domestic affairs. After a relatively quiet month in foreign affairs, he may regain vitality and become more assertive, thus increasing the backlash risk of TACO. The more intense verbal battles between the old and new Fed chairs may also lead to greater chaos.

Based on this, the firm believes that in the second half of 2025, the U.S. economy may face three "gray rhino events":

1) After the implementation of the Inflation Reduction Act, fiscal spending will focus more on "subtraction," showing a clearer tendency for spending cuts;

2) The reshaping of tariffs and international relations will become more "pragmatic and radical," increasing the backlash risk of TACO;

3) The differences in the attitudes of the old and new Fed chairs towards interest rate cuts will cause confusion, with the shadow Fed chair possibly holding "market dominance."

Predicting so-called "gray rhinos" and "black swans" is always difficult. More importantly, it is essential to think along the logical pivot of "refusing linear extrapolation": the path Trump takes to achieve his goals is dynamic, but the fundamental demand (i.e., returning to America's golden age) is static; all chaos will revolve around this.

A thousand people have a thousand "golden ages," but in Trump's eyes, the prosperous manufacturing America of 1990 is likely to be "greater" than the present.

(1) After the implementation of the Inflation Reduction Act, the new fiscal increment in the U.S. is limited, and future fiscal spending will focus more on subtraction.

It is almost certain that before the U.S. economy enters a recession, it will be challenging to see new fiscal stimulus policies. However, under the pressure of the deficit, the demand for fiscal contraction will become increasingly urgent. The U.S. is likely to enter a phase of reduced spending: this includes both exploring new areas for spending cuts (DOGE 2.0) and making more "effective and proactive" efforts within the existing framework.

Especially in terms of spending cuts, the firm emphasizes again that Trump has not treated the Inflation Reduction Act as a political tool: in the reduction of SNAP benefits, he has been more radical towards traditional red states and swing states with higher political costs

The "legacy" of DOGE 1.0 is still shining, for example, the U.S. State Department is implementing a new round of layoffs and advancing the disposal of government assets; on the other hand, it is important to recognize that Trump's split from Musk is not due to Musk's lack of effort in "cutting costs," as Trump has never denied the importance and significance of DOGE.

Another noteworthy point is that the OBBB Act is more about "tax cuts" rather than straightforward "transfer payments," which means that if the economy weakens and private sector taxable income declines, the stimulating effect of the act itself will be further discounted.

The source of cost-cutting is the undeniable deficit issue. For the United States, a deficit rate exceeding 6% during normal economic operations is akin to the sword of Damocles; any official lacking the willingness to cut costs can frequently look up to see if they are one step closer to it. Trump is not oblivious to this, nor is he unaware of the urgency of cost-cutting.

(2) The risk of TACO backlash is increasing, and Trump is becoming more "aggressive and pragmatic" in reshaping tariffs and international relations: more "liberation days," more frequent "TACOs," and greater volatility.

Recently, Trump has focused on domestic affairs, appearing somewhat "silent" on the international stage. After the OBBB Act was passed in Congress on July 4, Trump's short-term "domestic troubles" have disappeared, and he will once again turn to issues related to tariffs, military spending, and protection fees that are relevant to the U.S.'s medium- to long-term international competitiveness.

Trump has become more "aggressive and pragmatic" externally, which means that every non-U.S. economy needs to rethink what negotiation chips they can offer: Allied relationships or closer trade ties are merely tickets for quick participation in Liberation Day 2.0, but do not guarantee a good deal.

More importantly, demonstrating hard power, such as China's supply advantages in strategic resources like rare earths and metal minerals; it is especially noted that the bargaining power of soft power is declining in this round of negotiations, such as the traditional "Western cultural ties" of the UK and EU, the "North American locational advantage" of Canada and Mexico, and the "geostrategic value" held by Southeast Asian countries and Japan and South Korea.

Japan and South Korea, the two most important U.S. allies in Asia and key participants in Trump's efforts to curb Chinese influence, have been chosen as the first round of recipients of letters. The objective reality is that South Korea has taken the lead in aligning with the U.S., while Japan's stance is firm, which does not seem to hinder Trump from treating them equally in his eyes The tariff structure concerning Vietnam is particularly noteworthy; this phased tariff targeting transshipment is experimental: exploring the feasibility of tiered measures, testing the acceptance of trading partner countries, and more importantly, observing China's response attitude and specific countermeasures.

It can be expected that topics such as "TikTok acquisition," Greenland, the Panama Canal, and the "Gulf of Mexico," which have not appeared in the news for a long time, will gradually return and become negotiation chips for Trump at the bargaining table.

While Trump acts as an international affairs intervener and tries to please voters, one point he seems to overlook is that other countries also have politics; the views of voters in these countries on the United States will constrain corresponding actions. Moreover, the political pressure within the United States cannot be ignored; if every important bill requires Trump's personal mediation to pass, the vast and complex political system of the United States will also become a stumbling block for Trump.

Based on this, the bank has to emphasize again the vulnerability of TACO. Trump's retreat is merely based on a certain moment's "worst-case scenario," which does not mean that economic harm has not occurred, and as time progresses, the bottom line of this "worst-case scenario" will become lower.

(3) The remote confrontation between the new and old Federal Reserve Chairmen causes chaos, and the shadow Federal Reserve Chairman may possess "market pricing power."

As time progresses, the next Federal Reserve Chairman will gradually become clear. Powell will step down from the position of Federal Reserve Chairman in May 2026; assuming he also resigns as a governor, at that time, it is likely that at least four of the seven Federal Reserve governors will support Trump's monetary policy stance (Waller, Bowman, the successor to Quarles, and the successor to Powell).

One concerning point is that even if following tradition, a new chairman is normally nominated within the year, everyone will regard him/her as the "shadow Federal Reserve Chairman," amplifying the differences in monetary policy statements between the new and old Federal Reserve Chairmen. With discussions of firing Powell becoming rampant, it is already difficult to return to a normal succession rhythm.

Whether it is the shadow Federal Reserve Chairman or seizing Powell's monetary policy dominance in a more radical way, the impact on the United States is no less than Liberation Day 1.0, and may even be more severe. The selling pressure on long-term bonds may be magnified several times, and U.S. Treasury rates are a core pricing factor linked to different global markets, making a triple whammy of stocks, bonds, and currencies in the U.S. unavoidable, while also requiring attention to the ongoing spillover effects.

In the near future, the actions of the Federal Reserve will be difficult to decouple from politics. Especially with the upcoming interest rate cuts that rely too much on subjective judgment: this not only depends on the assessment of the economic situation but also on the randomness of Trump's tariff rhythm.

If not handled well, it could easily share the blame with Trump (for example, not cutting interest rates leading to an economic recession, or unnecessary large interest rate cuts causing re-inflation). Powell wants to avoid the continuation of these two scenarios to achieve a soft landing, but the incoming chairman may not care; this naturally forms a confrontational stance between the new and old Federal Reserve Chairmen.

For Powell, the more independent and rebellious he is, the more political legacy he leaves behind; currently, he has no reason to yield to Trump's extreme pressure.

Another point is the "public desire for rate cuts"; both stocks and bonds will benefit from a looser monetary environment (even if this level of looseness is unnecessary); however, when it comes time to raise rates, will Trump's current "Too High" be countered by "Too Low," thereby artificially increasing the volatility of monetary policy? It is also worth noting that after the resolution of the debt ceiling this year, the TGA account needs to be replenished by about $500 billion, and the traditional approach is to finance through short-term debt; issuing short-term debt also means a greater demand for the Federal Reserve to cut interest rates.

Indeed, the Federal Reserve Chair nominated by Trump may not necessarily act according to his wishes after taking office (Powell is an example), and this could become a replication of the current situation, with the continuation of such criticism further undermining the credibility of the dollar.

The new and old Federal Reserve Chairs will continue to have differing views on monetary policy, especially how the public statements of the incoming Chair will be interpreted by the market, and whether they will be priced into a more dovish monetary policy path is worth paying attention to.

In the short term, the overall path of interest rate cuts will not only be complicated by the still chaotic economic data; it will also become more elusive due to the remote confrontation between the new and old Chairs. From a medium-term perspective, fiscal dominance based on Trump's intentions may become a normalized disturbance during his term; when considering changes in monetary policy, "What does Trump want?" will linger in the mind for a long time.

Risk Warning

The increasing uncertainty in the Middle East situation significantly raises oil price levels, leading to more pronounced inflation in the United States; Trump's domestic policies face greater resistance; volatility in the U.S. financial markets intensifies, non-U.S. capital outflows accelerate, the dollar declines rapidly, triggering a deep recession in the United States