Daily Management Review

Fed's Plans to Hike Interest Rates in Doubt by Trump’s Win


11/09/2016




Fed's Plans to Hike Interest Rates in Doubt by Trump’s Win
The core assumption in global financial markets that the Federal Reserve will raise interest rates soon and follow with further gradual hikes over coming years is facing serious questions by Donald Trump's victory in the U.S. presidential race.
 
Reflecting fears of a prolonged global uncertainty over the Republican's policies and with the dollar and stocks sinking and safe-haven sovereign bonds and gold shooting higher, financial markets swooned after Trump's win.
 
Incidents such as a Chinese stock market slump in 2015 and the aftermath of Britain's vote to leave the European Union last June had resulted in market turmoil which has stayed the Fed's hand in the past.
 
As a status quo candidate who would be considered a safe pair of hands at home and on the world stage, investors have tended to favor Trump's Democratic rival Hillary Clinton.
 
Threatening to stall a tentative global economic recovery, Trump has pledged to tear up or renegotiate international trade agreements, which could set off a wave of protectionism. Massive tax cuts that many economists estimate would sharply boost the U.S. budget deficit are in Trumps plans.
 
"It raises the odds that the Fed will not move in December," said Mark Zandi, chief economist of Moody's Analytics, of Trump's victory on Tuesday.

Doubt over Fed Chair Janet Yellen's future is also cast by Trump’s win. Analysts have speculated on whether she would resign earlier as Trump has indicated he might replace Yellen after her term ends in January 2018 and has accused the Fed of keeping interest rates low to help Democratic President Barack Obama.
 
The lack of detail in Trump's economic plans has added to the uncertainty for the Fed and calling its further rate path into question.
 
While offering little specifics, he has proposed giving states more discretion in spending federal money on health insurance for the poor. On the other hand some economists questioned the assumptions underpinning the plan and a lack of clarity as to how the breaks would be funded as Trump has also promised cuts in individual and business tax rates.
 
The Committee for a Responsible Budget estimated that Trump's proposals could add $5.3 trillion to the federal debt over 10 years and said this has made it difficult to evaluate his proposals.
 
25 million jobs and roughly double the annual growth in the U.S. economy and a wave of business investment would be unleashed by his policies, Trump has said.
 
"We have a great economic plan, we will double our growth and have the strongest economy anywhere in the world," Trump told supporters in his acceptance speech.
 
Evans said that the Fed will set policy based on its mandate to foster full employment and stable prices and will not bow to criticism. "We need independence from short term political pressure," he told reporters in New York.
 
However the initial impact of Trump's protectionist policies may not be all bad. The initial impact would be to boost U.S. wages and inflation, something the Federal Reserve's easy money policies have so far struggled to accomplish, while tariffs threaten to fan trade wars and geopolitical tensions, economist Barry Eichengreen argued earlier this year.
 
Eventually triggering aggressive Fed rate hikes and a recession, a concern shared by some investors, fully implementing Trump's trade and immigration proposals could drive up inflation, Zandi's team at Moody's Analytics estimates.
 
"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.
 
(Source:www.reuters.com) 






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