author lewis alexander6

In a major surprise, it appears Donald Trump will likely win the US presidential election.  His primary economic policy proposals fall into three areas: large tax cuts, protectionist trade measures and restricting immigration.

Although these proposals at face value could affect the U.S. economy significantly, exactly how and to what degree they are implemented is an open question. That uncertainty stems from several factors, including the lack of specificity that has been provided, the lack of experience Mr. Trump has as a policy maker, who would serve in President Trump’s administration and the extent to which Congress (part of the checks and balances in the US government) allows these policies to be enacted. 

With these caveats in mind, financial conditions have already tightened and businesses and households may delay or reduce spending due to the initial uncertainty around what a Trump presidency would entail. Beyond the initial reaction, there is a higher probability of fiscal stimulus given a Republican-controlled Congress at a time of close to full employment. Further, Trump would also likely impose strongly protectionist trade policies which, in addition to the fiscal stimulus, would likely be inflationary.

The Fed probably would have to tighten more aggressively as a result, but it is unclear when that process would begin. If financial conditions stay tight, the Fed may not hike in December, but if conditions reverse quickly, as they did after the Brexit vote, the FOMC could still raise rates in December. After that, the Fed may take a “wait and see” approach on how fiscal policy evolves under Trump before signalling its future intentions.

President Trump may have a contentious relationship with a Yellen-led Federal Reserve. Ultimately the next president will get to nominate the next Chair, and Vice Chair, of the Federal Reserve. But Yellen and Fischer’s terms do not end until early 2018.