2026 is poised to be the year Trump wields his executive power to an unprecedented degree: voters will ultimately judge the merits of his domestic policies, while the creditworthiness of the US dollar will reflect the consequences of his foreign affairs.

As the new year begins, Trump has consistently dominated international headlines, launching initiatives on both domestic and foreign fronts. His domestic policies aim to mend the K-shaped economic recovery, his foreign policy aggressively seeks a "common denominator" for his re-election campaign and national interests, and he strives to create a more favorable macro-environment for the AI narrative.

The core issue of this election cycle is affordability, and Trump's domestic policies revolve squarely around this problem. A clear trend is observable: the role of monetary policy is narrowing, while the scope of fiscal policy is expanding, as the traditional economic policy framework is increasingly being supplanted by White House executive action.

While many ponder topics like "the old vs. new Fed Chair" and "Federal Reserve independence," there is a growing recognition that monetary policy's effectiveness is becoming more limited, while administrative measures offer more direct intervention. Over the coming year, we can expect to see an increasing number of "unconventional economic policies" emanating from the White House.

The perspective of political economy is gaining critical importance. In 2026, Trump will dramatically amplify his executive authority: the electorate will render its verdict on his domestic agenda, and the dollar's standing will signal feedback on his international maneuvers.

The first arrow: Improving domestic affordability.

Trump seeks to directly control the cost of living through a series of administrative actions, rather than relying on the Federal Reserve's monetary policy. In other words, Trump also recognizes the limitations of conventional monetary tools; interest rate cuts primarily make wealthy individuals feel the "prosperity" of the US economy more acutely.

A K-shaped economy manifests as one segment running "hot" while another runs "cold," with statistical averages presenting a deceptively optimal picture. Trump's efforts to improve affordability essentially aim to stimulate the "cold" lower end of the K-shaped economy—comprising low-income groups and suppressed employment.

From an income distribution standpoint, the labor income share corresponding to America's "working class" fell further to 53.8% in the third quarter of 2025, continuing the downward trend since 2000 and hitting a record low. Whether through tax cuts or more direct cash transfers, such measures would again increase the proportion of government transfers in total household income, creating greater pressure on the fiscal deficit.

The most direct policies in Trump's affordability toolkit are credit interest rate controls, specifically capping credit card rates at 10%, and housing market interventions, such as introducing 50-year mortgages and directing the GSEs (Fannie Mae and Freddie Mac) to purchase $200 billion in mortgage-backed securities (MBS) to lower mortgage costs.

Beyond these, one cannot ignore the continuation of Trump's other policies, including attempts to maintain relatively low crude oil prices by substantially increasing supply; restricting immigration to try to push up wages for low-skilled workers and alleviate housing pressure; and the implementation of tax rebates under the "Great Beautiful Act."

The most controversial among these policies is the 10% credit card rate cap, which would be the lowest level in US statistical history. Trump cited research claiming "this measure would save the household sector $100 billion in interest expenses," derived from the current $1.2 trillion in credit card balances (partly interest-bearing) multiplied by an approximate 12% rate reduction. Clearly, this calculation is overly static and likely an overestimate, representing another example of Trump's "violent aesthetics" in mathematics, following his tariff policies.

However, this mandatory interest rate cap could backfire, bringing with it the side effects of a command economy. There is a risk of reduced credit supply; capping rates at 10% may not truly lower costs but could instead cause banks to stop lending to high-risk (low-income) individuals due to insufficient interest margins. Even if banks continue lending to low-credit borrowers, the lower rates (and thus lower repayment pressure) could create moral hazard.

Furthermore, if the financial sector reduces resource allocation to credit card products while rates are forcibly controlled, without tightening overall system liquidity, the supply and demand for funds will flow into other unrestricted areas, leading to greater imbalances and inflationary (or asset price) pressures.

Directing the GSEs to purchase $200 billion in MBS is viewed as an administrative version of QE orchestrated by Trump. While not all liquidity provision via asset purchases qualifies as QE, this action undoubtedly increases demand for assets in a single market (MBS), boosts banks' willingness to issue mortgages, and consequently compresses mortgage spreads to a limited extent.

Following the Fed's introduction of the Reserve Management Program (RMP) in the December 2025 FOMC meeting, it became clearer that genuine QE is unlikely before the US economy enters a recession.

Fundamentally, purchases of corresponding assets (short-term Treasuries and MBS) by either the Fed or the GSEs can be seen as "quantitative easing" for the holders of those assets, but this does not generate significant spillover effects. In other words, this is relatively more beneficial for financial markets than for the real economy.

The interest rate suppression from policies enacted so far remains limited, yet there are almost no constraints on launching similar measures. For instance, the GSEs currently hold approximately $1.25 trillion in MBS each; adding the $200 billion purchase would bring them right up to the $4.5 trillion holding cap. However, this cap can be raised at any time, becoming a crucial channel for targeted liquidity release. Future potential liquidity injections could also rely more heavily on the Federal Home Loan Banks (FHLB), including setting more favorable rates, longer terms, and lower haircuts.

In essence, Trump's administrative tools can win through sheer volume, creating a cumulative impact. Yet these administrative measures still require support from the Fed; Fed rate cuts remain a more direct tool and arguably the most critical piece in Trump's domestic policy puzzle. This explains Trump's renewed judicial pressure on Powell, with the Department of Justice formally initiating an investigation into the Fed building renovation costs, seen as political pressure to force his resignation.

This move could backfire by casting Powell as a defender against overreach, upholding central bank independence. On the issue of central bank independence, it's worth reconsidering whether the 50bp rate cut before the 2024 US election was necessary—in reality, Powell himself has not fully maintained the independence of his decisions.

Even if Powell resigns as Chair, he might remain a Fed Governor to counterbalance the encroachment of executive power. In this context, Trump has signaled that Hassett is increasingly unlikely to become Fed Chair, favoring candidates with higher market acceptance, though uncertainty has grown—last weekend it was Kevin Warsh, this weekend it's Rick Rieder. Clearly, Trump's potential new Fed Chair is becoming "increasingly friendly" from capital markets' perspective.

The second arrow: Foreign policy seeking the "greatest common divisor" of US interests.

Whether through the swift strike on Venezuela or attempts to aggressively acquire Greenland, Trump's actions are fundamentally about seizing the "greatest common divisor" of US national interests, American voter concerns, and his own political demands. Beyond short-cycle demand for physical assets, we clearly see rising demand in the long cycle for basic survival goods like "energy," "food," and "guns"; these will also be key targets for Trump's push towards a form of US "state-owned enterprise" system, where survival equals strategy.

The "Operation Absolute Resolve" on January 3rd, which directly apprehended Maduro, marks the most forceful return of the Monroe Doctrine in the 21st century. Macroscopically, this aims to establish a US-led "Western Hemisphere energy fortress," creating a form of "oil-backed governance."

Trump's recent coveting of Greenland is underpinned by strong personal political ambitions, hoping to expand territory for historical legacy and further cement his "strongman politics" image to aid his re-election bid.

Additionally, it serves three important national strategic objectives: diversifying strategic minerals (Greenland's light/heavy rare earths and other resources), potential computing power infrastructure (data center cooling needs, aligning with the Stargate Program), and a new golden shipping route (the Arctic passage shortening Eurasia trade).

Viewed alongside the recent Davos Forum, Trump's ambition to "change America" becomes apparent. Bensons extensively discussed the failure of the Davos globalist model (over-reliance on international organizations, multilateral free trade agreements, and prioritizing social welfare over growth), arguing it should be replaced by Trump's model of economic nationalism centered on deregulation, large-scale tax cuts, and strategic tariffs—"America First" economics.

The TACO negotiations following the Greenland tariff threats and Trump's confrontations with European nations have created a sort of muscle memory. The "Greenland incident" has cooled into a "framework agreement" with NATO Secretary-General Mark Rutte—again demonstrating Trump's typical negotiation art: maximum pressure, humiliating Europe, and gaining concessions "cost-free."

Trump's belief in "peace through strength" also implies that few nations possess the capability to counter the US, leading naturally to more instances of the US breaking global rules; tariffs, AI resources, and even direct military intervention will all be options on the table. Assets like gold and bitcoin, which embed a long-term call option on "systemic chaos," will face more frequent pulse-like event shocks.

Notably, in the past year, a single threat from Trump often sufficed. But as markets become accustomed to this (with资本市场反应 becoming less sensitive), if Trump finds the marginal utility of threats diminishing, he might issue secondary threats on core issues, especially to bolster his re-election campaign (appearing tough externally). This could be the moment of real shock. Coupled with potential Fed "resistance," this might trigger another sell-off in US assets, pushing long-term Treasury yields higher and gold prices up, leading to renewed liquidity pressure on US stocks.

The third arrow: Maintaining AI leadership is imperative.

At the "Winning the AI Race" summit on July 23, 2025, Trump told Silicon Valley:

"Winning the AI race will demand a new spirit of patriotism and national loyalty in Silicon Valley – and long beyond Silicon Valley."

In other words, Trump believes past US tech giants were overly "globalist," even cooperating with competitors in some aspects, and he demands these AI enterprises prioritize serving US national interests. For example, the US government will no permit massive AI data center electricity demands to crowd out grid capacity allocated to ordinary citizens and traditional industries.

Propping up the K-shaped economy domestically and engaging in strategic predation abroad are essentially in service of AI's sustainability. No one knows when AI's "technological singularity" will arrive, nor the future pace of AI development. Therefore, Trump's first two arrows aim to create a better macro-environment for AI. Currently, computers and peripherals' share of equipment investment has reached levels comparable to communication equipment during the dot-com bubble, and data centers' share of broad structural investment is rising rapidly.

By 2026, the importance of external financing for AI firms is undeniable, and the associated private credit risks will further concentrate—we already see a higher proportion of private credit funds holding AI-related exposures. By the end of 2025, direct investment by private credit in AI firms showed very rapid growth, yet the credit spreads on loans to these AI firms did not significantly differ from other private credit loan categories.

Although the apparent macroeconomic and financial stability risks from the AI boom seem manageable for now, its sustainability hinges entirely on whether AI firms can deliver on extremely high profit growth expectations. Currently, stock price increases have far outstripped bond pricing levels; the resulting disconnect highlights the potential pressure from this imbalance—a significant stock price correction might be necessary to achieve a relative balance in risk premiums between the two asset classes.

Finally: The cost of the three arrows will be borne by dollar credibility.

The current test is Trump's political control. To maintain the relative stability of the US's complex economic system, his approach resembles "treating the head when the head aches, treating the foot when the foot hurts." But as the burdens mount—fiscal pressure, inflation pressure, deficit pressure, alliance relationships, etc.—the impact of policies will become more complex.

Ironically, these policies (price controls, interest rate caps, weakening central bank independence) are fundamentally very similar to the "Modern Monetary Theory" (MMT) championed by the far-left several years ago, yet are now being implemented by a populist right-wing figure. This illustrates that policies serve economic realities, not political ideology.

On January 11th, China's former ambassador to the US, Cui Tiankai, stated in a speech:

Many recent changes in the US will persist long-term, resulting from the concentrated exposure of deep-seated contradictions in American society, economy, politics, and culture, alongside governance system flaws; the MAGA ideology and its corresponding policies are a natural outcome arising from these profound US transformations.

Returning to the three arrows of Trump's New Year policies, administrative logic can temporarily override economic logic, but it cannot repeal economic laws. When the White House wields executive orders, attempting to forcibly suppress interest rates and create certain allocation distortions, these suppressed costs do not vanish; they are merely transformed into future inflation, default risks, and higher systemic volatility.

We must be vigilant against gradually falling into the optimism that "administrative intervention can always solve problems" (a form of "animal spirits"). All seemingly generous Trump policy dividends come with a steep, hidden price tag—already reflected in the increasingly heavy US debt, continually depleted geopolitical credibility, and more fragmented economic performance. These costs will be borne not just by Trump himself, but collectively by the US economy and the credibility of the US dollar.

Risk Warning Increased uncertainty surrounding Trump's policies leading to more pronounced financial market volatility and faster capital flight from the US dollar; the global economy suffering greater impact as tariffs become more defined, potentially leading to unexpectedly synchronized global easing in 2026, even synchronized balance sheet expansion, significantly easing long-term rate pressures; technological breakthroughs accelerating manufacturing reshoring, substantially lowering US production costs, and triggering a surge in credit demand; potential errors in data estimates.