Trump tariffs & Elon Musk's DOGE: US recession risk rising! Who'll save stock market? 

The US President Donald Trump speaks his mind. He wants to 'Make America Great Again'. Elon Musk too has big task at hands -- saving trillions via spending cuts. But the knight in shining armor could eventually be the US Federal Reserve. Will the all-powerful US central bank oblige?   

Stock markets globally are fearing that if US tariffs and DOGE dominate, US recession risks may escalate, triggering a global risk off. US tariffs may become a hodgepodge or trigger retaliatory actions from trade partners. Even DOGE could lead Trump into political hot waters if job cuts mount, Nuvama Institutional Equities warned.

On the other hand, the asset monetisation plan is still in nascent stage. If pursued, these policies would have meaningful implications, the domestic brokerage said.

If the Trump administration pursues higher tariffs, it will risk retaliation and a potential global trade war. This could strengthen the dollar and push US bond yields higher, which would not only be a double squeeze on the already weak global economy but also dampen US consumer sentiments, Nuvama said.

If Elon Musk is even half-successful in achieving his "rather outlandish" $2 trillion target for spending cuts, Nuvama thinks recession risks could escalate. After all, the government sector has been instrumental in shoring up the US economy of late. In 2023 and 2024, the US government accounted for 25 per cent of new job additions—a sharp ramp up from 5–6 per cent prevailing in the pre-pandemic phase, Nuvama noted.

"Government job additions accounted for nearly 25 per cent of total NFP additions in the last one year (versus 5–6 per cent norm). Similarly, government spending is 4 per cent of GDP, higher than pre-pandemic. If recession risks escalate, it could create a global risk off. UST yields shall fall, but dollar may rise amid risk aversion before the Fed’s aggressive easing reverses the trend," Nuvama said.

The asset monetisation plan could take multiple forms such as gold monetisation -- revaluing gold in the Fed’s balance sheet and transferring a large dividend to the US government or debt swap in which foreign countries swap their interest-bearing US debt with zero coupon long-term US debt in return for continued US security cover. 

"Whatever it may be, it would constitute an expansionary reset, which shall weaken the USD significantly, lower US bond yields and trigger a global risk on," Nuvama said.

Nuvama said it is unclear which policies will dominate and how much headway Trump/Musk will make with regard to those policies. Yet, what would be equally critical is shall the Fed complement fiscal actions. 

"For example, if DOGE successfully cuts fiscal spending materially, the Fed must offset fiscal squeeze with proactive monetary easing; else recession risks shall mount, and the deficit may indeed expand. Similarly, if the asset monetisation is implemented, which shall be expansionary and potentially inflationary all else equal; the Fed must not offset it with further tightening," Nuvama said. 

The brokerage said it is a tall ask as US core inflation is proving sticky and unemployment is near record lows. Nuvama said it is critical that the Fed is on board when these plans are put into practice. Else, it will only add to the uncertainty.