The GOP v.
the bond market.

The U.S. economy faces policy shifts that could inject uncertainty and create market volatility.

The GOP sweep of the White House and Congress will usher in a new paradigm for the economy, says Niladri “Neel” Mukherjee, CIO of TIAA Wealth Management. Markets will be sensitive to the Trump administration’s policy choices, and we will likely see greater volatility in 2025 after the S&P 500 delivered more than 50 record highs in 2024.

Mukherjee says the tug-of-war between the bond markets and Washington, D.C., will be a prime focus for savers and retirees. At one end of Constitution Avenue, the Federal Reserve weighs whether to continue cutting short-term interest rates as inflation cools. The Consumer Price Index, the most common measure of inflation, has fallen from 9.1% in June 2022 to 2.9% by the end of 2024, giving the Fed solid justification for lower interest rates.

On the other end of Constitution Avenue, the Republican-controlled Congress seems committed to enacting President Trump’s tax, trade and immigration policies, which could cause inflation and work against the Fed’s efforts to lower interest rates. President Trump has suggested eliminating income tax on tips, overtime pay and Social Security benefits. He proposed cutting corporate income taxes and renewing 2017’s Tax Cuts and Jobs Act.

More tax cuts would lead to bigger budget deficits and to increased bond issuance by the Treasury. This could raise the hackles of bond investors, who would demand higher yields in an attempt to impose fiscal discipline on Washington. Already yields on 30-year Treasury bonds have risen to 4.9% in January from 4.1% in October 2024. Mukherjee and team are waiting to see if this modest reaction turns into another “Liz Truss moment”—the bond market rebellion that forced the former U.K. prime minister to abandon her own tax-cut plan in 2022.

Tariffs, a cornerstone of President Trump’s economic agenda, could also have inflationary implications, as higher tariffs on imported goods would likely be passed along to consumers in the form of higher prices. Curbs on immigration, including deportations, could also be inflationary, with a trimmed workforce exerting upward pressure on hourly wages.

Mukherjee favors U.S. stocks over international. His enthusiasm for U.S. growth stocks is tempered by high prices, however. The S&P 500 in December traded at 22 times forward 12-month earnings, above its five-year average of 20 times and 10-year average of 18. With valuations already stretched, further upside for stocks will be highly dependent on strong earnings growth.

Any escalation of trade tensions would dampen growth prospects for China, Japan, export-oriented economies in Europe, and markets like Mexico and South Korea. The economic outlook for Europe and China is also clouded by their shrinking populations and labor forces.

Despite so much in flux, retirement savers should remain anchored to their long-term financial plans, Mukherjee says. Employers may wish to promote financial advice benefits to help keep participants on track amid increased volatility.

See how Republican Beltway control may affect plan sponsors. Read the next Trend.