Trump’s win has a silver lining: If he were to follow through with his economic proposals vis-a-vis trade and immigration, they could fuel inflation and boost wages, something that the Federal Reserve has been struggling with for the last couple of years.
With the U.S. presidential election throwing up a surprise winner, the unexpected turn of events has questioned the core assumption of global financial markets that the U.S. Federal Reserve will raise interest rates this year.
Donald Trump’s rise has had an inverse effect on financial markets: the dollar has sunk while the value of gold and safe-haven sovereign bonds have risen, reflecting fears of prolonged uncertainties over a Republican’s policies.
During the drive up to the elections, Trump had pledged to renegotiate international trade agreements, which could potentially set off a wave of protectionism and threaten the delicate fabric of the global economy.
Trump’s economic plans had called for massive tax cut which many economists estimate would only boost the United States’ budget deficit.
“It raises the odds that the Fed will not move in December,” said Mark Zandi, chief economist of Moody’s Analytics.
Trump’s win has also cast its shadow on Fed Chair – Janet Yellen. Earlier he had accused her of keeping interest rates low in order to help outgoing president Barrack Obama, thus upping the possibility of him replacing Yellen once her term ends in January 2018. Analysts speculate that this could lead to Yellen resigning earlier.
As part of his economic plans, Trump had proposed giving states more discretionary powers on federal spending, including health insurance, but offered little specifics. Similarly, he had also promised to reduce individual and business tax rates, which led economists to question his assumptions that formed the basis of his plans, as there was, again, not enough specifics as to how this will be funded.
Following his proposals, the Committee for a Responsible Budget had said, it is difficult to evaluate Trump’s proposals. Despite this, as per their estimates, Trump’s plan could bump up the federal debt to $5.3 trillion in 10 years.
In his acceptance speech, Trump told his supporters, that his policies will unleash a wave of new investments, create 25 million jobs and roughly double the annual growth of the U.S. economy.
“We have a great economic plan, we will double our growth and have the strongest economy anywhere in the world,” said Trump during his acceptance speech.
Although Trump’s protectionist policies can fan geopolitical tensions and trade wars, however it can potentially also accomplish something that the Federal Reserve has been struggling to do: boost inflation and wages.
As per estimates from Moody’s analytics, if Trump were to fully implement his immigration and trade proposals, it could boost inflation and could trigger an eventual rise of interest rates.
“His tax cuts could open up a huge increase in the budget deficit and his trade sanctions could interrupt world trade. This could put us in a recession,” said Donald Selkin, chief market strategist at National Securities in New York.
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