The financial markets are now starting to assess the implications of a Donald Trump presidency, and there is inevitably a reaching back to historical precedents.
History provides us a comfort blanket for those that are unsure:
- President Reagan is cited as a politician who adapted.
- President Carter could be cited as an anti-establishment politician with virtually no experience in dealing with the legislature, even of the same party.
- President Eisenhower could be cited as the last president elected with no previous experience of political office.
The desire for reassurance could perhaps be inferred from the strength of the markets’ reaction to Trump’s conciliatory victory speech yesterday. Something that was conventional in tone, even if unprecedented in tone was seized upon with alacrity.
While waiting for the details of Trump’s cabinet, further details of his legislative agenda and some guidance as to his approach towards the Federal Reserve, there are some immediate conclusions that can be drawn.
The focus on infrastructure spending in Trump’s remarks and the overall tenor of Trump’s tax plans are likely to be passed relatively rapidly into law. Trump’s initial position on tax was changed to parallel views of the Republican House Leadership, and infrastructure spending is regarded as a relatively easy pass through Congress.
In a cyclical sense, the degree of fiscal stimulus that this implies at a time of relatively full employment, should probably be regarded as inflationary.
The increase in constructions costs that such a program implies is more a relative price shift. Construction prices rising relative to non-construction prices, but the increase in aggregate demand rising from the fiscal spending impact on wages is a more general form of inflation.
Bearing in mind that most measures of U.S. inflation, excluding oil, are running at or above their 20-year averages already, this gives further upside risk to the U.S. inflation outlook.
The upside risk comes before any consideration of trade policy consequences or currency moves, or indeed questions of the Fed’s independence.
As it happens, long-term investors could do well, and this is important, considering that the dollar is likely to weaken in an environment where the Fed falls further behind the curve on inflation control, and specifically we could see the dollar lose some ground against the euro.
Politics remain an ever-present risk of course, but the question now is how robust the global economic fundamentals and thus how resilient is the global economy to any potential shocks or uncertainties that come from the policy mix of a Trump Presidency.
Besides that, Judy Shelton, a member of President-elect Donald Trump's advisory team and who is an economist and co-director of the Sound Money Project, which has been campaigning for a hawkish monetary policy for a long time, told the Financial Times while not specifying the kinds of reforms Mr. Trump would seek, said: “He has made it a very strong point of his campaign that he thinks that the Federal Reserve’s intervention and elongated accommodative monetary policy has created a false economy, people who have worked all their lives have been penalized by these low rates.” She also reiterated that Mr. Trump wants to see someone at the helm of the Fed whose thinking is more in line with his.
S&P has affirmed its AA+/A-1 rating of the US following the presidential election and confirms that “the outlook remains stable.” It says this reflects an expectation that the inherent institutional strengths of the U.S. will offset the high level of debt and increased policy uncertainty
Today, San Francisco Fed President John Williams, Richmond Fed President Jeff Lacker and St. Louis Fed President James Bullard all to speak on the economic outlook.
Given the inflation prognosis that we have, it is still reasonable to expect the Fed to raise interest rates in December, but of course the question is not what happens to policy in the twilight of the Obama presidency, but what comes next.
The Euro area is also offering us a sort of inflation statistics from smaller Euro area economies today, which is moderately important in assessing the rising inflation pressures in the Euro area, at least as far as headline inflation is concerned, although it’s worth noting the core inflation pressures remain relatively uncorrelated across the Euro area.
Also, a brace of ECB speakers gets the wires today. The ECB’s reaction to the political news from the United States is less easy to determine, because the ECB was less obviously on a clear policy path before the election result and perhaps because the international perception of the election will naturally be different from the domestic perception, at least as far as potential risks are concerned.
Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.
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