On Jan. 20, two things happened that could have a major effect on banks and the economy this year: President Trump's second inauguration, and the release of Chinese AI startup DeepSeek's new large language model.
"These are two big reasons why, underneath the 2.7% steady forecast [for GDP growth], you've got this huge uncertainty — the geopolitics stemming from Trump's arrival in office, and the uncertainty around technology and specifically how AI plays out," said Sebastian Mallaby, senior fellow for international economics at the Council on Foreign Relations, speaking Wednesday at CFR's New York City headquarters during a panel about what's likely to affect the economy in 2025.
Looming over bankers' expectations for 2025 are questions about what exactly the Trump administration will do in office, as well as how ongoing trends such as a boom in AI spending will play out this year.
An early signal was this week's drop in the stock market as investors digested what sort of threat cheaper AI models could pose to the valuations of U.S.-based AI companies. (The stock market recovered quickly.) "The market freakout on Monday was maybe the biggest freakout, or one of them, since the post COVID freakouts," Mallaby said.
One question bankers have is whether this is the year that deals return in force, from mergers and acquisitions to funding transactions of all kinds.
"There's a lot of pent-up deal flow, particularly in financial services," said Adam Posen, president of the Peterson Institute for International Economics, a Washington, D.C.-based think tank. "You potentially have a multiyear boom, even if the Fed raises rates, where this pent-up deal flow and desire to be in the U.S. fuels that."
Tariffs and a change in environmental standards as Trump jettisons Biden-era regulations would spur companies to put more manufacturing facilities in the U.S., especially since climate-related rules in places like Europe discourage "heavy, dirty industry," Posen said. That could spur M&A and juice banks' advisory revenues.
Although the state of the economy played a large role in the presidential election, what's striking is that economic metrics are strong if you pretend Trump does not exist, said Karen Karniol-Tambour, co-chief investment officer at the hedge fund Bridgewater Associates, based in Westport, Connecticut.
"Growth is pretty good," Karniol-Tambour said. "Inflation has come down a good amount, and you have a Federal Reserve that really, really wants to believe that it can continue to at least ease a little bit. So if that's all you knew, you would say this is a great time."
Trump's policies could have both positive and negative effects on the economy, she said. Tax policy is one lever: Trump has said he wants to extend and increase the cuts enacted in his first administration, which could have a big impact on companies' and individuals' finances as well as government revenues.
An issue important to bankers is deregulation, where federal agencies under Trump could get out of businesses' way and remove uncertainty. Most CEOs are waiting eagerly to see which rules get slashed, Karniol-Tambour said: "My personal impression is that the breadth of CEOs, something regulatory under Biden was meaningful to them, and they're relieved now."
But as the White House loosens its grip on companies, the administration hopes to tighten control over parts of the government that traditionally operated on their own. The Fed's independence from the White House, for example, is also no longer a given, the economists said.
"It would not surprise me if Trump said, 'I want the Fed to do what I want the Fed to do,'" including firing Powell, whether or not it's legal for him to do so, said Douglas Rediker, managing partner at research firm International Capital Strategies and nonresident senior fellow at the Brookings Institution, the D.C.-based think tank.
(At his monthly press conference following the Federal Reserve Open Market Committee meeting,
Despite all the chaos in the news, investors seem to think that the economy will continue to do well and won't see more dramatic price hikes, Karniol-Tambour said.
"The markets are giving tremendous credibility to the idea that the U.S. is able to keep its inflation under control," she said.
