Who Has to Leave the Federal Reserve Next?

Economic

Summary:

The leadership of the Federal Reserve has undergone substantial turnover in the past few years. President Biden has put four new governors on the seven-member Federal Reserve Board in Washington, and several of the 12 regional Fed banks have named new presidents.

By law, the president nominates a Fed chair and two vice chairs for four-year terms. They must be confirmed by the Senate for those positions in a vote distinct from their confirmation as members of the Fed Board of Governors. Jerome Powell was confirmed for a second four-year term as chair on May 12, 2022. Philip Jefferson was confirmed as vice chair on September 7, 2023. He succeeded Biden pick Lael Brainard, who left the Fed in early 2023 to head the White House Council of Economic Advisers. Michael Barr, another Biden nominee, was confirmed as vice chair for (bank) supervision on July 13, 2022, succeeding Trump pick Randal Quarles.

The other Biden choices for the Fed board were Lisa Cook, confirmed by the Senate in May 2022 and then confirmed a second time in September 2023 for a term that expires in 2038, and Adriana Kugler, confirmed in September 2023 for a term that expires in 2026.

The president and Senate have no say in picking presidents of the 12 regional Fed banks—they’re chosen by their private sector boards of directors, subject to the approval of the Fed Board of Governors in Washington.

Presidents of the regional Fed banks can serve until they’re 65—unless appointed after turning 55, in which case they can serve for a maximum of 10 years or until they’re 75, whichever comes first. For instance, Mary Daly, appointed on October 1, 2018, at the age of 55, falls into the second category, which means her term is up in October of 2028. Neel Kashkari, the youngest of the current regional presidents, can serve through 2038. Esther George of the Kansas City Fed retired in early 2023 after reaching the mandatory retirement age; Jeffrey Schmid succeeded her. James Bullard of the St. Louis Fed resigned in summer 2023, before his mandatory retirement date, to become dean of Purdue University’s business school; Alberto Musalem succeeded him. Loretta Mester of the Cleveland Fed reached mandatory retirement age in June 2024; Beth Hammack succeeded her. (As Kaleb Nygaard has documented, this retirement rule dates to a 1936 decision by the Board of Governors.)

After press reports of their stock market trading raised eyebrows, Boston Fed President Eric Rosengren retired, citing health issues, on September 30, 2021, nine months earlier than his mandatory retirement, and Dallas Fed President Rob Kaplan retired on October 8, 2021, four years before his mandatory retirement date, because “recent focus on [his] financial disclosure risks becoming a distraction to the Federal Reserve.” The Boston Fed subsequently named Susan Collins as its new president, and the Dallas Fed named Lorie Logan.

Presidents of the 12 regional Fed banks are up for reappointment every five years. The Fed Board of Governors in Washington could replace any of them, though it hasn’t ever done so.

Who Has to Leave the Federal Reserve Next?_1

The Fed governors in Washington serve fixed 14-year terms that are staggered; one term expires every two years. If a governor leaves before his or her term is up, the successor completes their term. Governors filling unexpired terms can still be appointed to a new one, meaning that they can serve for more than 14 years. Only two Fed governors, however, have served for more than 14 years in the past half-century of Fed history. The median term length is a little over five years. By law, the president cannot remove a governor except “for cause,” a legal term that means he would have to show that the person had done something wrong.

Who Has to Leave the Federal Reserve Next?_2

Two of the current members of the Fed Board of Governors were initially appointed by Donald Trump (Bowman and Waller). Powell was originally appointed to the Board by Barack Obama in 2012 and was first named chair by Donald Trump. Powell’s term as chair expires in May 2026, and Michael Barr’s term as vice chair ends in July 2026. Philip Jefferson’s four-year term as vice chair expires in September 2027.

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Risk Warnings and Disclaimers

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IFS

Economic

Introduction

Healthcare is the Scottish Government’s largest area of spending. The NHS Recovery, Health and Social Care budget is plannedto be £20.6 billion this year, around one-third of the total Scottish Government budget – and close to half of day-to-day spending on public services. Decisions about health spending are therefore crucial for the upcoming Scottish Budget, as they influence how much money is available for other public services and how much needs to be raised through devolved taxes.

One of the key priorities of the Scottish Government is ‘ensuring high quality and sustainable public services’. In this comment, as part of our wider work in advance of the 2025–26 Scottish Budget, I update our analysis of Scottish NHS performance from earlier this year. I first show that hospital activity remains substantially below pre-pandemic levels. I then show that various measures of waiting time performance have worsened over the last year.

Throughout, I compare NHS performance in Scotland with performance in England. Scotland has long spent more publicly on healthcare per person than England, though this gap has closed substantially over the last two decades. Health services in both Scotland and England were similarly affected by the COVID-19 pandemic, and so England is an important benchmark against which to assess the performance and recovery of the Scottish NHS.

NHS activity

Let us first examine how NHS activity (i.e. the number of patients receiving treatment) has changed over time in Scotland. Figure 1 shows how various measures of NHS activity have changed relative to the final quarter of 2019 (the last full quarter unaffected by the COVID-19 pandemic). Panel A shows four important types of hospital activity: day cases (procedures delivered within a day), elective inpatients (pre-planned procedures delivered with an overnight stay), emergency inpatients (emergency patients admitted to hospital) and outpatient appointments (treatment or assessment in a clinic that only takes a short time to complete). Panel B repeats this analysis for two experimental measures of primary care activity: direct contacts (direct contact between clinical staff and patients, such as in-person and telephone appointments) and indirect contacts (including prescription management, interactions with hospitals, test results and administration).

NHS Recovery in Scotland is Lagging behind England’s_1

NHS Recovery in Scotland is Lagging behind England’s_2

Panel A shows that all four types of hospital activity fell sharply during 2020 as the NHS prioritised capacity to treat COVID-19 patients. Although activity has recovered somewhat in subsequent years, the numbers of patients treated by hospitals for most types of activity remain substantially below pre-pandemic levels. In the latest available data, for April to June 2024, overall acute hospitals in Scotland delivered 15% fewer elective inpatient admissions, 9% fewer emergency inpatient admissions and 6% fewer outpatient appointments than in October to December 2019. An exception is day cases, where hospital activity has increased substantially over the last year, and was almost the same (0.3% higher) in April to June 2024 as pre-pandemic. Nonetheless, total inpatient and day case activity was 6% lower in April to June 2024 than in October to December 2019. At the rate of increase in activity seen over the last year, it would take another two years for inpatient and day case activity to just return to pre-pandemic levels, and three years for outpatient activity.

The NHS in Scotland has taken steps to reduce demand on hospitals, which may partly explain why activity has not recovered to pre-pandemic levels. For example, the Centre for Sustainable Delivery (a national unit commissioned by the Scottish Government to improve Scotland’s healthcare system) aims to eliminate 210,000 unnecessary outpatient appointments this year. The Scottish Government also wants to reduce what it sees as unnecessary hospital admissions for older people. But alongside these efforts, the Scottish Government has many other objectives to increase hospital activity – for example, by using National Treatment Centres to deliver 20,000 extra surgery procedures. The Scottish Government’s NHS Recovery Plan, published in 2021, aimed to increase inpatient and day case activity to 15% above pre-pandemic levels by 2024–25. The Scottish NHS is far from achieving this target, and Audit Scotland has warned that it is not being transparent about performance.

Although the number of patients treated in hospital is lower, the average length of stay in hospital has risen since the start of the pandemic. This means that the overall number of inpatient hospital bed days is almost the same (0.7% higher) as pre-pandemic in Scotland. Higher length of stay could be driven by patients requiring more complex treatment than pre-pandemic, and therefore might suggest that hospitals are providing more healthcare than activity numbers alone would indicate. This may be in part because of the continued presence of patients with COVID-19 in hospital, a driver of higher average length of stay in England earlier in the pandemic. But higher length of stay could also be driven by challenges with system flow, in particular delays in discharging patients who are medically ready to leave hospital. In September, there was an average of 1,968 beds in the Scottish NHS occupied by adults who could not be discharged, compared with 1,521 in September 2019.

One factor unlikely to explain the failure of acute hospital activity to return to pre-pandemic levels is a shortage of staff. NHS staffing in Scotland is much higher than pre-pandemic. For example, the NHS in Scotland has 13% more consultants (senior doctors) and 12% more nurses and midwives in June 2024 than in June 2019. As we discussed in our previous report, this provides suggestive evidence that the labour productivity of hospitals in Scotland is substantially lower than pre-pandemic, as is also the case in England. Rather than staffing, it may be that a lack of available hospital beds is preventing further increases in inpatient activity in Scotland (the number of acute hospital beds is 5% higher than pre-pandemic, though the total number of hospital beds is 1% lower than pre-pandemic).

Hospital activity remains below pre-pandemic levels in Scotland, but this is not the case in England. As we have recently reported, NHS hospital activity in England is now substantially above pre-pandemic levels. For example, in April to June 2024 (the latest period we have data for Scotland), the number of elective admissions delivered in the English NHS was 8% higher than pre-pandemic, the number of emergency admissions was 2% lower and the number of outpatient appointments was 11% higher than in October to December 2019. Taking all of this together, hospital activity in both Scotland and England is increasing, but Scottish activity remains substantially below pre-pandemic levels. This is despite the fact that hospital activity in England has been reduced by frequent and widespread industrial action, which has not occurred in Scotland.

Measures for primary care activity are experimental. But they suggest that primary care activity in Scotland has recovered by more than hospital activity (Panel B of Figure 1). In the latest available data, for July to September 2024, GP practices in Scotland delivered 8% fewer direct contacts than pre-pandemic, but they delivered 16% more indirect contacts. The primary care sector therefore seems to have recovered better from COVID-19 than hospitals, although appointments remain below pre-pandemic levels.

NHS performance

NHS activity is an important measure of how well the health system is performing and how well it is translating its resources – staffing, beds, funding, and so on – into healthcare outputs. But what matters for a person needing treatment is the ease of accessing treatment and the quality of the treatment they receive. While it is hard to measure the quality of treatment in general, one important measure of NHS performance is how long patients need to wait for treatment.

Table 1 therefore shows how a range of NHS waiting times measures have changed over time in Scotland and England. The first column for each nation compares current performance with pre-pandemic performance, while the second column of each pair shows how performance has changed over the last year.

Starting first with changes since the start of the pandemic, NHS performance is currently worse than pre-pandemic across all measures considered in Scotland. The elective waiting list is higher (having risen from 362,000 in December 2019 to 725,000 in September 2024) and waiting times are longer. For example, the share of patients waiting less than four hours at A&E is lower (falling from 81.6% in December 2019 to 65.9% in September 2024). The same is also true in England – across all measures considered, performance is worse than pre-pandemic.

There is a clearer difference between Scotland and England when it comes to performance over the last year. In Scotland, almost all measures of NHS performance have worsened over the last year. For example, the elective waiting list has continued to grow (from 692,000 in September 2023 to 725,000 in September 2024), and the share of patients waiting less than four hours at A&E has fallen slightly (from 66.5% in September 2023 to 65.9% in September 2024). The only measure considered that has improved in Scotland is for diagnostic tests, where the share waiting six weeks or less has risen (from 49.8% in September 2023 to 53.6% in September 2024). But in England, most measures have improved over the last year. For example, a smaller share of patients are waiting more than four hours at A&E, a larger share of patients are being treated within 62 days for cancer, and a larger share of patients are receiving diagnostic tests within six weeks.

This therefore suggests that hospital performance is still worsening in Scotland, while it is improving in England.

NHS Recovery in Scotland is Lagging behind England’s_3

Conclusion

Performance in the Scottish NHS remains below pre-pandemic levels across many measures. Even more concerningly, many measures of performance have continued to worsen over the last year. In large part, that is because most NHS hospital activity remains far below pre-pandemic levels, far from the ambitious targets in the Scottish Government’s 2021 NHS Recovery Plan. Since hospitals are overall treating fewer patients than pre-pandemic, with only slow improvement over the last year, it should come as little surprise that waiting times are not improving. Indeed, across most measures of waiting times, performance has worsened over the last year.

One reason for this failure to increase hospital activity above pre-pandemic levels is that average length of stay is much higher than pre-pandemic. This might reflect the increased complexity of the patients that hospitals have to treat, including the continued presence of patients with COVID-19 in hospitals. But the failure to increase hospital activity likely also reflects challenges in discharging patients. However, it is likely not explained by a shortage of staff – the NHS in Scotland has many more staff than pre-pandemic (though the increase in staff since the start of the pandemic in Scotland is smaller than that in England).

The pattern in the English NHS is different. In short, while performance in both countries is below pre-pandemic levels (and lower than governments and populations would like it to be), things are, if anything, still getting worse in Scotland, whereas they have started to improve in England. Many types of hospital activity in England are now higher than pre-pandemic, though still far from recovery targets, and most of the performance measures considered here have improved over the last year. In England, there has been a large focus from both the previous and the current government on improving NHS performance and productivity. Similar focus is needed in Scotland.

Looking ahead to the Scottish Budget, the key question is to what extent this poor NHS performance will force the Scottish Government to prioritise further increases in health spending relative to other services. Then, aside from any funding decision, there remains the ongoing challenge of ensuring that money is spent well, staff are deployed effectively, and productivity in the NHS is enhanced – all essential if waiting times are to be reduced.

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Risk Warnings and Disclaimers

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ING

Economic

Since 1999, the EU and Mercosur (comprising Argentina, Brazil, Paraguay, Uruguay, and since 2024, Bolivia) have been negotiating a trade agreement. While an agreement in principle was reached in 2019, EU members refused to ratify the deal.

Today at the Mercosur Summit in Uruguay, attended by EU Commission President Ursula von der Leyen, the agreement took a significant step closer to finally coming into effect, with both EU and Mercosur states signing the deal.

Trade agreement to slash tariffs, saving EU companies €4 billion annually

The trade agreement foresees the following (amongst other factors):

Tariff reductions: The agreement will remove over 90% of tariffs on goods exchanged between the two blocs, saving EU companies around €4 billion worth of duties each year. For some products, duties will be phased out over longer periods to provide companies in Mercosur countries with a sufficient amount time to adapt.

Easier market access: Elimination of non-tariff barriers, discriminatory tax treatments, and the facilitation of trade in services.

Sustainability: Provisions to ensure that trade does not come at the expense of environmental and labour standards.

If approved by the EU member states and the EU parliament, this would create one of the largest free trade zones in the world. The EU and the five Mercosur states together make up 20.2% of global GDP, with the EU contributing the lions share with 17.4% (Brazil: 2.1%, Argentina: 0.6%, Uruguay: 0.1%, Paraguay and Bolivia: 0.04% each).

In terms of population, the trade deal would unite 730 million people (450 million in the EU), or about 8.9% of the global population. While goods trade between the two blocs is still relatively small, totalling €109.4bn in 2023, the EU is Mercosur’s second-largest trade partner for goods, following China and ahead of the United States. Conversely, Mercosur ranks as the EU’s tenth-largest trade partner for goods. When it comes to trade in services, the EU has exported €28.2bn to Mercosur, while Mercosur exported €12.3bn to the EU in 2022. The trade deal is expected to significantly boost goods trade between the two regions.

Trade in goods between the EU and Mercosur

EU and Mercosur seal Agreement Following Decades-Long Negotiations_1

The pain and gain of some of the main sectors involved

But here’s the catch, and the reason why the agreement hasn’t been signed in five years – it faces significant opposition. France and Poland, amongst others, are openly opposing the trade deal. Meanwhile 11 countries – Germany, Spain, Portugal, Sweden, Denmark, Finland, Croatia, Estonia, Latvia, Luxembourg, and Czechia – recently called for the swift conclusion of the deal in a letter to the President of the Commission. Germany, for example, sees Mercosur as a key market for its auto exports. Currently, average car tariffs on imports into Brazil, for instance, stand at 35% compared to an import tariff of 10% in the EU.

Food and agri – mixed reactions

Food and agri products represent the biggest part of the EU’s imports from Mercosur, with total a total import value of 23 billion euros in 2023 (42% of total imports). The agreement will facilitate trade growth due to a mix of larger import quotas as well as reduced and removed tariffs and duties on products like beef, poultry, sugar and soybeans. That's stirring discontent among EU beef, poultry, sugar beet and soybean farmers, given that their Mercosur counterparts can operate at lower costs.

Other companies in the food sector are more supportive. This is either because they can benefit from lower input costs, like confectionery and soft drinks manufacturers, or because the deal creates better market access for European cheese, beer, wine and spirits exporters.

For EU consumers, we would argue that any deflationary impact on food prices will be difficult to spot. Firstly, quotas will likely be expanded over multiple years to avoid market distortions. Secondly, quotas will be larger but they still represent only a small portion of total EU consumption. Thirdly, the costs of these products make up only a part of the final price that consumers pay. In the case of a premium steak bought in a restaurant, factors such as labour costs are also an important part of the equation.

Automotive – slashing the barrier could be positive for European exporters

A trade agreement between the EU and Mercosur countries could bring some light to the darkness for the struggling European car industry. Current tariffs of up to 18% on autoparts and even 35% on cars are obviously not very beneficial for export propositions. EU countries exported €1.1bn of passenger cars to Brazil, the bloc’s largest market, in 2023 and Germany was responsible for almost 60% of this. Altogether – and including the largest category automotive parts – EU countries exported almost €5bn worth of vehicles and automotive parts to the Mercosur member states.

Including Bolivia, the Mercosur members produce just about as many cars as their domestic sales annually, but a significant chunk of this is exported to the rest of South America as the continent hardly has any other production sites outside of Brazil and Argentina. South America has a production deficit of about 30%, making it dependent on car imports. South American car markets therefore provide more growth opportunities than the sluggish European home markets.

Driven by high import tariffs, European manufacturers like the Volkswagen Group and Daimler Trucks have established their manufacturing sites on the continent. A reduction in tariffs could boost production in Europe, where occupancy rates are currently low.

Critical raw materials – a key element in the deal

While critical for the EU’s economic future, raw materials like lithium are making less headlines in the coverage of the free trade agreement. That’s surprising, given that a) the EU is very dependent on China for critical raw materials, b) countries like Argentina, Bolivia and Brazil hold large reserves of some of these critical raw materials and c) EU demand for these materials is expected to massively increase.

We've previously written about how demand for lithium batteries (which power electric vehicles and energy storage) is set to increase 12 times by 2030, while the bloc’s demand for rare earth metals, used in wind turbines and EVs, is set to rise five to six times by 2030. It may be difficult to quantify the exact economic value of having better access to these materials through closer ties with Mercosur, but we believe this particular element carried a lot of strategic weight for the EU Comission when striking the deal – especially as diversification or sourcing and securing supply is currently top of mind.

More farmers’ protests loom as EU-Mercosur agreement nears completion

The signing of the trade deal is expected to spark new protests from farmers – particularly those in France – who strongly oppose it. This response will mostly be borne out of a fear that the elimination of tariffs will lead to a substantial inflow of cheaper South American agricultural products, particularly beef, with products not meeting Europe’s stringent environmental and food safety standards. French President Emmanuel Macron might even face stronger pressure at home, given that he was unable to stop this deal and that it looks unlikely he'd sign the Treaty in the current political situation in France.

In Poland, the Netherlands and Austria, farmers fear that the deal will lead to unfair competition, doesn’t meet the EU’s environmental ambitions, and contributes little to GDP for some member states. The expected GDP boost for the Netherlands is only 0.03% in 2035, compared to a GDP gain of 0.23% for Spain, for example.

The ratification process could fail again

If the trade agreement is signed in its current form, i.e., a ‘mixed’ agreement including both trade and non-trade measures, it would necessitate approval from the European Parliament as well as all national parliaments. It would also require ratification by all 27 EU member states. While the EU can negotiate trade agreements on behalf of its members with a qualified majority, any agreement involving shared competence between the EU and its member countries must be ratified by each member state. Remember that also the Canadian-European Trade Agreement (CETA) has not been ratified yet by all member states.

To avoid repetition of the CETA experience, the EU could therefore split the agreement into two parts: the pure trade agreement and the non-trade measure part. For the pure trade part, a qualified majority vote would be required instead of approval from all 27 members, meaning that at least 15 EU member states representing 65% of the EU population would need to approve. Consequently, at least four member states representing 35% of the EU population would be needed to block the deal. The same procedure had been in place for the tariffs against electric vehicles made in China.

A beacon of hope amid global protectionism

This agreement comes at a time when the world is facing increasing protectionism, with US President-elect Donald Trump returning to the White House. He has made no secret of his fondness for tariffs. However, protectionist tendencies are not solely limited to Trump.

This week, Beijing announced export bans on key minerals such as germanium and gallium in retaliation against US controls on semiconductor technology. Additionally, new tariffs worth $18bn on Chinese products will take effect in January 2025 and 2026. Elsewhere, the EU has also stepped up its protectionist measures against China this year – and Mercosur countries aren’t holding back either. Brazil introduced import tariffs on electric vehicles (BEVs) of 10% at the start of the year, climbing to 18% in July and up to 35% in 2026.

A trade deal between these two economic blocs would be welcome amid a global climate engulfed by a new era of protectionism, and would be significant step towards ongoing trade liberalisation. However, the likelihood of success remains slim – and we're interested to see whether free trade supporters can prevail over the protectionists this time around.

Source:ING

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ING

Economic

Turkey's inflation rate came in at 2.2% in November, higher than the market consensus (1.9%) and our call of 1.8%. However, the annual figure has maintained its declining trend and fell to 47.1% from 48.6% a month ago as a result of favourable base effects (inflation stood at 3.3% in November 2023). Cumulative inflation reached 47.1% vs the Central Bank of Turkey's revised 44% forecast for the whole year.

PPI stood at 0.66% month-on-month, showing a drop to 29.5% year-on-year from the month prior, and this was driven by energy prices. While the data implies a notable weakening in cost pressures in the second half of this year – which is also attributable to supportive currency developments – global commodity prices, particularly oil prices given the current geopolitical backdrop, will likely remain the key determinant of the PPI trend in the coming period.

Core inflation (CPI-C) came in at 1.5% MoM, the lowest monthly reading since late 2021. It moved down to 47.1% on an annual basis, supported by the relatively slow-moving FX basket and increasingly benign PPI outlook. Going forward, pricing behaviour and inertia in services remain key risk factors for the pace of Turkey's disinflation process.

Inflation outlook (%)

Source: TurkStat, ING

Regarding the underlying trend, TurkStat will release seasonally adjusted (sa) headline CPI and core indicators tomorrow. An early analysis reveals that the underlying trend of inflation should maintain its gradual improvement in November driven by both goods and services. As an additional note, with the release of the latest inflation report, the CBT dropped its previous emphasis on an inflation path based on the quarterly average of monthly inflation rate (sa) as an indicator for a significant and sustained decline in inflation. However, according to new projections, the Governor sees the rate dropping below 1.5% MoM in seasonally adjusted terms in the third quarter of 2025, which implies a significant delay; this level was the call for the last quarter of 2024 previously. It's expected to decline further to slightly above 1% MoM in the fourth quarter of 2025.

In the breakdown:

The food group turned out to be the major contributor to the headline rate once again with 1.23 percentage points. Compared to the same month last year, unprocessed food inflation recorded a strong increase (9% vs 0.3% in 2023) with the highest November figure in the current inflation series, driving the upward move in food inflation. Processed food prices, on the other hand, showed a deceleration (1.6% vs 4.9% last year). Accordingly, monthly food inflation at 5.1% was one of the key factors contributing to a higher-than-expected increase in November.

This was followed by housing, with a 0.4ppt contribution reflecting the continuing impact of rent increases. The pace of these increase has dropped, however. According to the MPC minutes, leading indicators suggest that monthly rent inflation will decelerate in December as well.

Household equipment was the third largest contributor, pulling the headline rate up by 0.21ppt.

As a result, goods inflation inched down to 39.0% YoY, while core goods inflation – a better indicator for the trend – recorded a slight increase to 28.9% YoY. Services, which are less sensitive to currency movements but more heavily impacted by domestic demand and minimum wage increases, maintained their downtrend to 67.9% YoY with continuing signs of improvement.

Annual inflation in expenditure groups

Source: TurkStat, ING

Overall, the tightening in financial conditions and monetary policy has now started to contribute to the return to the disinflation path, and will likely continue in the period ahead. Last month, The CBT's communication suggested that we are nearing a gradual rate-cutting cycle, implying that a December move may be a real possibility. The revised guidance also tied rate cuts to both realised and expected inflation, suggesting that the central bank will closely watch ex-ante and ex-post real rates. Accordingly, we expect a 250bp cut from the bank this month – though we do not rule out a smaller move, especially given the higher-than-expected November figure signalling ongoing challenges to disinflation efforts.

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SAXO

Economic

The globalist system that formed in the ashes of World War II was built on the combination of a US security guarantee to protect trade routes for the “Free World” and the use of the US dollar as the chief currency for transactions and as a store of value. Even after the greenback's link to gold was broken by US President Nixon in 1971, the US dollar continued its domination in the globalised economy.

Cue the 2016 US election and the advent of President Trump, the first president in living memory to bash at the foundations of the global system, demanding tariffs for imported goods to right the huge US trade deficit wrongs and decrying the cost of maintaining the vast US security umbrella. US security alliance partners were shocked, and China was put on notice. But then came the pandemic and a new election brought Biden and encouraged the notion that Trump was an aberration, not the new norm. Then there was the 2024 US election and return of Trump. If Trump 1.0 was the warm-up act for deglobalisation, Trump 2.0 will prove the main event, with all of its consequences for the US dollar.

In 2025, the new Trump administration overhauls the entire nature of the US relationship with the world, slapping massive tariffs on all imports, while slashing deficits with the help of an Elon Musk-run Department of Government Efficiency (DOGE). The implications for the US dollar are dire for trade around the world, as it cuts off the needed supply of dollars to keep the wheels of the global USD system turning, ironically risking a powerful spike higher in the US dollar. Instead, safety valves are found, as global financial actors scramble for alternatives. China and the BRICS+ transact with gold-backed digital money and, to a degree, directly in a new gold-backed offshore yuan. Europe rebases its trading relationships increasingly in the euro. Gold-linked crypto stablecoins add to the mix, as this dramatic new chapter in global financial markets begins.

Potential market impact

The crypto market quadruples to more than USD 10 trillion, the US dollar falls 20% against major currencies and 30% versus gold. The US economy continues to reflate, but wages keep up with goods inflation, as production resources reshore to the US. US exporters advantaged.

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Devin

Central Bank

Sixteen years ago, state-appointed professionals created the International Forum of Sovereign Wealth Funds, a knowledge exchange platform for managing public financial assets responsibly. The 2024 annual meeting in Muscat, Oman, hosted by Oman Investment Authority, marked a pivotal moment for IFSWF. Its theme – ‘Embracing disruption and searching for resilient futures’ – provided a platform for open discussion and collaboration, aptly termed the ‘Muscat dialogue’.

Over the three days, the Muscat dialogue comprised of sovereign funds and other state-owned investors discussing various policy, investment and operational issues. This open dialogue was instrumental in what could guide responsible financial management in managing state-owned financial assets in a complex global macro-financial landscape.

The changing role of sovereign funds

Traditionally, sovereign funds were established as stabilisers safeguarding national wealth. Some were explicitly tasked to help build macroeconomic resilience during growth volatility.

However, discussions in Muscat highlighted that these institutions are increasingly being tasked with taking on a broader domestic role against pressing global challenges such as climate change, supply chain disruptions, geoeconomic fragmentation and rapid technological advancements. As custodians of public monies and investors, governments increasingly view their funds as macroeconomic instruments for deploying capital, generating returns, and shaping and supporting structural transitions in their domestic economies.

A broader policy role

Sovereign funds are components of a country’s macroeconomic strategy alongside other sovereign financial entities, such as central banks, public pension funds and development-focused funds.

Collectively, these institutions form a vital financial fiscal buffer for nations, helping them absorb shocks, stabilise economies and achieve long-term objectives. Their integration into broader policy frameworks demonstrates the increasing recognition of their relevance in managing sovereign wealth on behalf of the people.

However, changing expectations of their mandate and purpose require IFSWF members to adhere to the highest governance and management standards. As custodians of national wealth, they must balance fulfilling fiduciary responsibilities with addressing broader policy goals such as sustainability and equitable growth.

The discussions in Muscat explored the evolving mandates of SWFs, with four major themes emerging.

Investing in a dynamic policy environment

Navigating ever-changing regulatory landscapes, geopolitical tensions and macroeconomic shocks requires agility. Sovereign investors must balance addressing immediate challenges and maintaining a long-term vision. Their ability to adapt and evolve in the face of these pressures makes them indispensable players in national and global economic policy frameworks.

Financing the energy transition

Sovereign funds are increasingly taking a leadership role in the global energy transition, with renewable energy emerging as a focus. While these funds alone cannot resolve the climate crisis, their ability to mobilise private capital and de-risk investments in recipient countries is transformative. By championing robust governance, transparency and integrity in their investment destinations, sovereign funds can catalyse climate action and set standards for responsible investing globally.

Artificial intelligence

AI technology represents both promise and pitfalls for investors. It can offer sovereign investors unprecedented opportunities to enhance and streamline investment processes and portfolio management. However, concerns such as data biases, regulatory uncertainties and the cultural shifts needed to integrate AI effectively were hotly debated. Participants emphasised the importance of well-defined, high-conviction AI use cases to ensure meaningful adoption while avoiding potential risks.

Reimagining asset allocation

Traditional asset allocation models must be revised to handle economic uncertainty better in today’s volatile environment. The pandemic and subsequent inflationary pressures highlighted the limitations of models that failed to anticipate systemic shifts. Discussions in Muscat called for adaptive strategies that balance liquidity needs with long-term growth, ensuring resilience in a constantly evolving financial landscape.

What lies ahead

The Muscat dialogue concluded with six actionable priorities for IFSWF members. First, to enhance governance by strengthening transparency. Second, to leverage technology with AI and integrate digital tools into investment processes while addressing associated risks. Third, to expand partnerships – to amplify the cross-border impact of investments and foster creative collaboration with development banks, multilateral organisations and private investors. The remaining priorities include leading in renewable energy, modernising asset allocation and prioritising social impact as sovereign funds must continue safeguarding national wealth for future generations while addressing broader social objectives.

The next IFSWF annual meeting in Abu Dhabi in 2025 will serve as a benchmark for assessing the progress made on the priorities outlined in Muscat. The ‘Abu Dhabi dialogue’ will provide an opportunity to evaluate how sovereign investors have further adapted to the shifting global economic and geopolitical landscape.

Until then, Muscat’s insights will continue to shape the strategies of sovereign-owned funds worldwide, ensuring their continued relevance as instruments of stability, innovation and sustainability in an unclear future.

Source:Udaibir Das

Risk Warnings and Disclaimers

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UBS

Economic

2024 has been yet another year of US exceptionalism – US economic growth repeatedly surprised to the upside and beat out other advanced economies, US stocks have soundly outperformed ex-US equities, and the US dollar is up. But this price action just continued a trend that has extended for nearly 15 years.

Since the stock market bottomed post-GFC in March 2009, MSCI USA has outperformed MSCI ex USA by 4.5% annually in USD terms. This US outperformance reflects several favorable drivers including faster nominal GDP and earnings growth, larger margin expansion and a rise in valuations. A comparatively favorable business environment, fiscal stimulus and critically, dominance in megacap tech underpin these trends.

With this historical track record, it is hard to bet against the US. And incoming President Trump’s ‘America First’ policies should support US equities via tax cuts and deregulation, while disproportionately undermining ex-US companies vulnerable to tariff uncertainty.

The US economy continues to hum along, with positive real wage growth and solid productivity, while Europe and China suffer from weak consumer confidence and a stall in global manufacturing. Moreover, there is little to suggest the artificial intelligence (AI) theme is set to stumble, which disproportionately accrues to US tech companies and should improve productivity for US companies across a variety of industries. We have been overweight US equities through the bulk of 2024 and plan to carry this position into 2025.

There is only one problem: valuations. The S&P 500 12M forward P/E is above the 90th percentile going into 2025, and the US’ valuation challenge is no longer just about megacap tech – US stocks excluding the ‘Magnificent Seven’ have also reached the 90th percentile. Valuation is a not a timing tool and has low explanatory power for performance under a year. But over longer time frames it matters and mean reversion, in response to a worthy set of catalysts, can begin at any time.

Given extreme relative valuations and a strong consensus for US outperformance next year, it is worth exploring ways in which markets could surprise so that we are ready to adjust when the facts change.

What could disrupt US exceptionalism?

(i) Narrowing growth differentials

US growth has repeatedly surprised to the upside thanks to fiscal policy and resilient household spending. But fiscal support will fade next year (potential incremental tax cuts won’t take effect until 2026), and slower immigration may weigh on aggregate incomes and spending. In contrast to the US, European growth has already been weak; allowing for more aggressive European Central Bank cuts, which should help housing and give European consumers the needed confidence to start spending their savings. From a market expectations standpoint, US growth has gone through a sequence of upgrades this year and has a higher bar to keep beating, while the rest of the world faces a low bar for improvement.

A convergence in growth between the US and rest of the world would be given a boost if major economies, namely Germany and China, adopt more expansionary fiscal policy. In the case of Germany, the snap Federal election on February 23rd has the capacity to bring about fresh thinking on fiscal policy. For China, we think fiscal expansion has capacity to increase. It is possible Chinese policy makers have left themselves room to act in the scenario of a growth dampening trade-war.

It is worth remembering that in Trump’s first year as President in 2017, emerging markets soundly beat US stocks and the USD depreciated – surprising most investors. This can be largely attributed to China’s stimulus driving global manufacturing, making the US less exceptional. Of course, the US-China trade war began the year after, reversing this theme.

Note, we still think outright growth in the US will outperform, and the risks are skewed to the downside for the rest of the world versus the US, but given starting points and expectations, there is a risk growth converges more quickly than we expect.

(ii) Trump 2.0 is not Trump 1.0

In President-elect Trump’s first term he had a clear mandate to boost nominal GDP growth. Inflation was of little concern, deficits and debt to GDP were much lower and 10-year yields were at 2%. In contrast to 2016, one of the reasons, if not the key reason, Trump was elected this year was unhappiness with inflation.

Trump’s mandate is different this time – while tariffs and tax cuts are campaign pledges that will likely be delivered, voters would presumably be unhappy with policies that drive the prices of goods up too much or make housing even less affordable via higher mortgage rates. These political realities may act as constraints on Trump’s tariff and fiscal plans. Despite the threats, he may end up delivering much less on the tariff front which should ease risk premia on non-US equities and currencies. He may also need to dial back corporate tax and stimulus plans to ensure US yields and mortgage rates do not rise too sharply.

(iii) Sector concentration

US exceptionalism has been driven in large part by dominance in the technology sector. The Magnificent Seven now represent nearly one-third of US market cap, a striking degree of concentration. The current level of valuations reflects high earnings and sales expectations, which increase the bar for surprises. In recent quarters, the magnitude of tech sector earnings surprises has started to decline from very elevated levels. Valuations could be challenged if this trend extends.

Over the last two years, large tech companies have dramatically stepped up capital expenditure to develop AI infrastructure. But there is a lot of uncertainty on when and by how much these companies will be able to monetize on this capex in earnest. Investors may start losing patience if there is delayed adoption of AI capabilities.

Moreover, current AI champions benefit from low competition which underpins elevated profit margins. But this environment is unlikely to last forever, especially if the government presses forward with antitrust actions. While we think the US government is focused on the US winning the AI race and won’t do too much to undermine its tech champions, the sheer concentration of these companies makes any risk to their outlook worth monitoring.

Asset allocation

In our view, the anticipation of Trump’s pro-growth policies can continue to support US equities into 2025. Moreover, tariff uncertainty is likely to limit the ability for ex-US equities to outperform. We remain overweight US large cap market weight, equal weight and small cap indexes versus Europe. We are also long the USD versus EUR and CNH.

That said, we are conscious that US exceptionalism can get too stretched, leaving markets vulnerable to even minor changes in the narrative. As discussed above, we are monitoring relative growth differentials, Trump’s actual fiscal and tariff policies, and any questioning of the AI narrative.

On growth specifically, there is potential for US economic data to moderate organically into 2025. Many Fed rate cuts having been priced out, and we have begun adding duration in portfolios as the risk-reward has improved. Gold also is an effective portfolio diversifier to fiscal largesse, geopolitical risk or issues with Fed credibility.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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