With optimistic investors pushing Wall Street to fresh record highs again overnight, the world's largest bond trader PIMCO has warned President-elect Donald Trump's protectionist policies could risk leading to a recession.
Overnight, all four major US indices closed at record highs for the first time since December 1999 on the back of promises made by Mr Trump for tax cuts, infrastructure spending and a reduction in regulation.
However, research from PIMCO noted that wage and inflation pressures would be exacerbated if Mr Trump curbed trade and immigration, as his campaign platform promised.
"Under that scenario, the Fed eventually would likely need to raise rates more aggressively than in a scenario without fiscal stimulus and cosh-push inflation through protectionism, which could push the economy into recession in 2019 or 2020," PIMCO warned.
Mr Trump has already vowed to pull out of the world's largest trade deal, the Trans-Pacific Partnership on his first day in office, with potential adverse consequences for other signatories such as Australia.
"Trading partners could impose countervailing tariffs or retaliate in other ways; China, for instance, could sell its holdings of US Treasuries," wrote Libby Cantrill, head of public policy for PIMCO in a research note.
"In market terms, right tail risks, which could result from supportive economic policies, have increased. But left tail risks, which could result from policy missteps, may be just as fat, if not fatter."
When Mr Trump assumes the presidency, he will have broad powers to act without congressional approval in trade and immigration policy.
Mr Trump would also have broad powers over foreign assets and terms of trade, if his administration determines national security is in jeopardy, PIMCO said.
The paper noted that investors are eyeing Mr Trump's cabinet-level appointments for clues to how policy will play out.
"Many advisors who are currently leading the Trump transition on trade seem to share the protectionist views that President-elect Trump advocated on the campaign trail," Ms Cantrill wrote.
Former Goldman Sachs executive Steven Mnuchin is considered a frontrunner for the role of treasury secretary, while billionaire investor Wilbur Ross Jr is being considered for commerce secretary.
Earlier, Mr Trump had tweeted, "Great meetings will take place today at Trump Tower concerning the formation of the people who will run our government for the next eight years," clearly expecting to serve two terms as president.
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