Chapter 4: Violent States of America

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Will the Federal Reserve lower interest rates?

Throughout the year, the Fed is forecast to hold interest rates between 4.5% and 5%. Markets expect the Fed to raise interest rates by 0.25% to 0.5% in the first half of 2023 and to maintain vigilance throughout the year.

The Fed’s primary objective is to reach 2% inflation. Despite the fact that inflation has fallen from 9% to 7% in the previous six months, the Fed is concerned about unexpected global events like the Ukraine crisis or Chinese COVID policies causing new disruptions in the global supply chain. With the exception of inflation, the US economy performed well, with normal unemployment.

Political violence

In 2024, the United States will have its next presidential election. President Joe Biden will be 81 years old during the 2024 election and 82 when he takes office in 2025. We expect Biden to launch his campaign for a second term in 2023. Despite rumors, Vice President Kamala Harris has failed to create a stable political presence, leaving Joe Biden as the Democrats’ best chance in 2024.

Former President Donald Trump is set to face charges in 2023. There are four major allegations against him: the attempt to violently reverse the 2020 election on January 6, the fraudulent management of the Trump Organization, pressuring Georgia officials to find the “missing votes,” and, of course, his retention of classified nuclear-related documents at his Mar-a-Lago residence. An indictment of Trump would increase polarization in the debate. There is a subculture among some Trump supporters who believe Trump is fighting a corrupt political system that has stolen his victory in 2020. This rhetoric came to an end on January 6, 2021.

The economic crisis will have an effect on Latin America, driving migration. The security of the United States’ southern border will continue to be a hot topic, particularly among Republicans. Despite being an objective problem, southern border security has the potential to fuel polarization.

There is also good news: Voters throughout the country rejected practically all candidates running for governor or secretary of state in 2022 who questioned the validity of Biden’s win over Trump in the 2020 election. Future state elections will be administered by governors and secretaries of state.

The political polarization has less of an impact on America’s global status than the general public believes. US advanced industrial allies and partners around the world continue to value the US in terms of national security relations, both in terms of direct military coordination and, more broadly, in asymmetric threats (counterterrorism, cyberdefense) and national security-related components of the global economy such as semiconductors and fintech. This is less true in rising Latin American, Southeast Asian, and Sub-Saharan African economies, and notably in Middle Eastern oil producers. However, the shift is attributable to the rise of China and other countries rather than political instability in the United States.

Even if some of those who participated in the Capitol riots two years ago on January 6 are now in prison, the danger of political violence remains. The schism that generates public wrath has become a structural feature of American culture, aided in part by social media, especially as generative AI becomes more accessible.

The US will become more difficult for investors

Political polarization directly impacts investors. For companies used to looking at the United States as a homogeneous market with a predictable regulatory framework, the environment will become more difficult. Historically, incentive programs were used to compete for business investment among the 50 states. Left-wing politicians are pursuing more pro-worker, consumer, and environmental policies that raise the cost of doing business in their states. In contrast, conservative politicians are identifying themselves by fighting with the largest employers on issues such as environmental, social, and governance (ESG) legislation. State-level political risk will become crucial to a successful company strategy; this contrast will make long-term investment planning more vulnerable to local politics and gerrymandering, making the whole United States less appealing to both domestic and foreign businesses.

US foreign policy

With bipartisan backing, Washington is expected to continue imposing additional export controls and investment restrictions aimed at lowering the United States’ dependence on China for key items and restricting China’s access to crucial technology. Existing rules will be enforced, imposing additional limits on bilateral commerce and investment.

We expect the government to mobilize USD $200 billion over the next five years to fulfill its Partnership for Global Infrastructure (PGII) pledge to low- and middle-income countries through grants, federal financing, and private sector investments in sustainable infrastructure in order to defend its economic interests, such as supply chains, against geopolitical rivals that can disrupt them. The strategy is nothing new; as China is investing in low- and middle-income nations across the world, the US and its allies are expected to pursue a similar strategy, reminding us of the competition for “the Third World” during the Cold War.

Washington must safeguard its economic reliance against China and other aggressive actors such as Russia and Iran. For Washington, it would be ideal if the EU became more autonomous and capable of making a significant contribution to this policy in the Middle East, Eastern Europe, and North Africa. As a result, we should anticipate more coordinated policies from Washington, Brussels, Paris, Berlin, and London. Bipolar geopolitical tendencies bring the Western world closer together.

Concerning the Ukraine crisis, the US will almost certainly continue to help Ukraine as long as Ukrainians are willing to fight, but only in proportion to Russia’s rising actions. Since February 2022, all of Putin’s actions have been geared toward escalation, but NATO has simply responded proportionally, preventing an unintended clash between the two superpowers. Fixing the energy sector is a key part of slowing down Russia’s expansion. It is not a primary problem for an energy-independent United States, but it is a particular source of contention among its EU allies. Washington is likely to intervene and increase its gas exports to Europe, as well as manage its relations with South Korea, Japan, and Qatar, in order to promote a faster pivot of Qatari gas contracts in Asia towards the EU before the start of the Germany-Qatar deal, which is expected to begin in 2026.

In relation to China, Washington is expected to increase the cohesion among QUAD members (India, Japan, Australia, and the US) and coordinate with other members for whom China is a threat, such as Taiwan, South Korea, the Philippines, Vietnam, and Indonesia.