All for the sake of being elected! The policy combination in the United States in the first half of next year: Tariff reduction + easing of monetary and fiscal policy?

One, losing the midterm election is an unbearable burden for Trump. At the end of last year's US presidential election, the Republican Party led by Trump swept both houses of Congress, winning control of Congress and becoming the biggest source of confidence for the Trump administration to launch a major offensive in domestic and foreign affairs this year. On November 3 next year, the midterm elections are coming, and the seats in both houses of Congress are facing reelection, posing a major test for the Trump administration. In history, it is not uncommon for a president to lose control of Congress, which will not only hinder internal legislation, budgets, personnel, etc., but also significantly reduce the influence on the international stage. In recent years, with sharp opposition between the two parties and political deterioration, the fate of the "lame-duck" president has become increasingly bleak. For example, Trump lost the House of Representatives in 2018, leading to funding for the border wall being blocked, and the US government experiencing the longest shutdown in history at that time. At the end of 2019 and the beginning of 2021, Trump was impeached by the House of Representatives twice, creating history in the United States. In 2022, Biden lost the House of Representatives, which also led to an impeachment inquiry into the Biden family in 2023. Since Trump's second term, the polarization between the two parties has reached new heights, and if there is a defeat in the midterm, it is not difficult to imagine the "revenge" of the Democratic Party. More importantly, considering factors such as law, age, and health, it is unlikely that Trump will seek a third term. Once there is a defeat in the midterm, it will no longer be in the long-term political interests to remain loyal to Trump, and significant cracks will appear within the Republican Party. In the recent Epstein case, the open document petition led by the House Democratic Party was able to gather enough votes because four Republicans turned against, including one of Trump's former close allies. Two, Trump's prospects for the midterm elections are not optimistic. The Republican Party continues to control the Senate. There are a total of 100 seats in the Senate, with a ratio of 53:47 between the Republican and Democratic parties. Senators serve six-year terms, with only 1/3 of seats up for reelection every two years, so next year's midterm elections will see 33 seats up for reelection, with 20 controlled by Republicans and 13 controlled by Democrats. In addition, there will be special elections for 2 seats next year, to replace Vice President Vance and Secretary of State Rubio. Although the Republicans have more seats up for reelection, most of them are safe, and they are not at a disadvantage. According to the forecast from 270towin, among the 35 seats up for reelection, only 6 are considered competitive, with both Republicans and Democrats currently controlling 3 each. Therefore, even if Democrats win all 6 seats, they can only form a 50:50 balance. When the votes are equal, Vice President Vance will cast the deciding vote, just like Trump's OBBB narrowly passed the Senate. The risk of losing control of the House of Representatives is not small. There are a total of 435 seats in the House of Representatives, with a ratio of 219:214 between the Republican and Democratic parties, with 2 vacant seats, a slim majority. Since the terms of representatives are only two years, all seats will be up for reelection in next year's midterm elections, and forecasts show that there are 19 fiercely contested seats, with 10 controlled by Republicans and 8 controlled by Democrats, with the Republicans able to lose a maximum of 2 seats to retain control. In this situation, Trump is pressuring Republican state governments to redraw House districts. Redrawing districts selectively based on partisan demographics can change the political landscape within the state, a long-standing political tactic in American politics. However, with the increasing polarization between the two parties, the recent redistricting battles have become more intense. In August, Texas redrew districts flipping up to 5 blue districts red, and in November, California passed Proposition 50 flipping up to 5 red districts blue, a color reversal. In addition, more state governments are getting involved in the redistricting process. Even if the Republicans gain an advantage through redistricting, historical experience suggests that the outlook is not optimistic. According to statistics, in 20 midterm elections since the end of World War II, the president's party has lost control of the House of Representatives 15 times, with an average loss of 26 seats each time. Recently, the Democrats have been winning consecutive victories in local elections, further sounding the alarm for Trump. Therefore, taking effective measures to alleviate the real issues facing American society should be the focus of the Trump administration's work next year. Three, the social and economic problems in the United States have worsened this year. In last year's election, the Democratic Party suffered a major defeat, with economic issues overshadowing all other issues. After nearly a year in office, the Trump administration has not only failed to alleviate many social and economic problems, but has also exacerbated them. Firstly, the cost of living continues to rise. Tariff policies have led to the US CPI returning to over 3% from a low of 2.3%, with the goods CPI rising by over 3 percentage points from the low point last year. Due to the Republican Party's insistence on canceling the Affordable Care Act by the end of this year, not only has the US government set a new shutdown record, but if subsequent votes cannot continue subsidies in some form, the healthcare costs for 24 million low-income Americans will double next year, adding to their burdens. Public opinion polls show that among many issues, dissatisfaction with Trump's handling of prices far exceeds other issues. At the same time, the risk of unemployment is also rising. Capital expenditures related to artificial intelligence have maintained decent growth in the US economy, but the displacement of entry-level jobs, layoffs by large companies to save cash flows, have led to a "jobless prosperity," and the tech cycle in the stock market has further hidden this structural problem. Trump's core staff, the pragmatic White House economic advisor, Hassett, recently admitted that while artificial intelligence has improved labor productivity, it has also slowed down hiring. In addition, Trump's internal reforms, using DOGE and government shutdowns to lay off employees, have exacerbated the unemployment problem. The wealth gap has widened further. According to Federal Reserve data, as of Q4 2024, the top 1% of US households owned 30.9% of total wealth, the next 1%-10% owned 36.4% of wealth, the next 10%-50% owned 30.2%, and the bottom 50% owned only 2.5% of wealth, showing a stark wealth gap. By Q2 2025, after Trump's administration took office, the top 1% of households had increased their wealth by 0.1% to 31%, the 1%-10% group still owned 36.4%, the 10%-50% group decreased by 0.1% to 30.1%, and the bottom 50% still owned 2.5%. This reflects the class characteristics of American society in the first half of this year: the wealthy continue to accumulate wealth, the middle class continues to decline, and the bottom tier of the populace remains near the poverty line. These issues have led to consecutive defeats for the Republican Party in recent local elections. For example, mayoral candidate Mamdani in New York stood out in the New York City elections by promising to increase taxes on the wealthy and large corporations, freeze rents, and provide free childcare and transportation. Four, the political demands reflected in Trump's policies. Trump attaches great importance to personal political interests, especially when losing the midterm election becomes an unbearable burden, striving to alleviate current issues while avoiding new problems is the top priority for the Trump administration's work next year. Current issues are the cost of living and the wealth gap, corresponding to the vast bottom-tier voters. The objective reasons for the issues stem from inherent problems in the US economy over the past few decades, such as the hollowing out of the manufacturing industry, the aftermath of MMT, and structural issues brought about by artificial intelligence, which are difficult to resolve in the short term. The subjective reasons are related to Trump's domestic and foreign policy choices, such as tariffs, the reduction in fiscal spending based on political motivations, including the OBBB tax cuts coming into effect next year, which not only make it difficult to effectively address longstanding problems but further increase living costs and widen the wealth gap. For example, by the end of this year, American consumers will bear 55% of the tariff costs, American companies will bear 22%, foreign export companies will bear 18%, and the remaining 5% will be circumvented through other means, equivalent to almost 80% of the tariff costs being borne by the US itself. Therefore, although the current annualized tariff revenue of over $300 billion can reduce the deficit rate by 1%, it essentially taxes the private sector widely and does not bring substantial reshoring of manufacturing. This means that Trump is unlikely to play a big role in tariffs next year. There may be tariff storms based on diplomatic threats, but further raising tariffs fundamentally does not align with Trump's personal political interests. Recently, the Trump administration has taken action to exempt 237 food items and Shenzhen Agricultural Power Group from retaliatory tariffs. Fiscal stimulus is a short-term remedy for subsidizing low-income groups, but the OBBB has the opposite effect. The Congressional Budget Office (CBO) estimates that the OBBB bill will increase the deficit by $4.5 trillion between 2025-2034, with an increase of about $500 billion next year, equivalent to a 1.6% increase in the deficit rate. However, the bill benefits the wealthy more, with the CBO estimating a negative net effect of the OBBB on the bottom 30% income group, indicating that the bill not only widens the wealth gap but directly harms the low-income group. Therefore, Trump may need to push for a new fiscal plan next year. Trump recently stated that tariffs will bring "at least $2,000 in dividends to everyone except high-income individuals," while Bezent hinted that further discussions have not been specific, possibly through tax cuts rather than direct cash payments, such as exempting tips and overtime pay from taxes and reducing taxes on car loans. In theory, over $300 billion in tariff revenue can cover 150 million middle and low-income groups, but it will face challenges in the congressional agenda, especially as the deficit rate will further increase by 1%, bringing the deficit rate close to 8% in the 2026 fiscal year. The new problem is the entanglement of artificial intelligence in the United States, reflecting the interests of the wealthy class and the tech right-wing. As artificial intelligence continues to contribute more to the US economy and stock market, before it can significantly increase labor productivity, pushing the bubble further seems more in line with the common interests of the upper class. Coupled with risks in the US job market, even if Powell takes a hawkish stance before his term ends, after his term ends in May, the Federal Reserve is expected to be in a loose position for a period of time. Overall, based on Trump's political demands of "everything for the midterm election," the policy combination for the first half of next year will be "tariff rollback + fiscal and monetary stimulus": maintaining a stable tariff policy and gradually withdrawing them; cutting taxes for middle and high-income earners first under the fiscal policy, and quickly striving to issue tariff rebate checks to the middle and low-income earners; the monetary policy will continue to exert pressure on easing under Powell until the start of a new chair, where further easing will likely take place. The biggest risk of this policy combination is a resurgence of inflation. Rolling back tariffs is advantageous for curbing commodity inflation, but "fiscal and monetary stimulus" may exacerbate inflation. If inflation rises in the second half of the year, reducing the burden on people's livelihoods will be a challenge; and if tightening monetary policy leads to the breakdown of the narrative surrounding artificial intelligence, it will have a major impact on the US economy and stock market. Faced with a dilemma, this will be the stage of the highest uncertainty in US political policy in the coming year. The fundamental reason for policy dilemmas lies in the inherent problems in the US economy that are difficult to resolve and the conflict between Trump's domestic and foreign policies this year and the interests of the midterm elections, leading to conflicting short-term solutions needed to address both new and old problems next year. Five, reflections on US-China relations. Focusing on internal issues, a fundamental principle is to avoid intense confrontation with a powerful "adversary." In the late October meeting between the leaders of China and the US, several measures, including tariffs and rare earths, were postponed for a year, just before the midterm elections next year, which is not only conducive for Trump to focus on internal issues over the next year but also maintains flexibility in his strategy before the midterm elections, with the possibility of initiating new negotiations between China and the US in the autumn under normal circumstances, to achieve more agreements as political achievements, and in extreme cases, there is also the possibility of rekindling waves and confusion in US-China relations. For China, maintaining basic stability in US-China relations or even meeting the demands of Trump from time to time is beneficial for us to focus on our own affairs, consolidate our advantages, remove bottlenecks, and strengthen weaknesses. Next year marks the beginning of the "Fifteenth Five-Year Plan," and various social and economic work needs to be consolidated and advanced. At the same time, maintaining stability between China and the US also provides an opportunity for us to shape a favorable external environment with a proactive historical spirit. In addition, Trump is planned to visit China in April next year, during which a series of achievements are expected to be made. For example, after the summit meeting, the US will reduce the tariff on fentanyl from 20% to 10%, creating basic conditions for cooperation. Recently, the FBI director visited China, potentially further promoting cooperation. Bezent had previously stated in mid-October that if the fentanyl issue is resolved within 6 months, all fentanyl tariffs can be lifted, corresponding to the visiting China in April next year as an opportunity to completely cancel all fentanyl tariffs. Overall, US-China relations in the coming year are expected to maintain basic stability in terms of trade and the economy, with competition in technology being a long-term issue and geopolitical tensions a dynamic and ongoing process.