US Election

Here you can find Dr. Holger Schmieding´s assessment of the situation.

Dr. Mickey Levy: Implications of the Trump Victory

1) The election of Donald Trump as President and Republicans winning plurality in both the House of Representatives and Senate represent the electorate’s rejection of the Establishment’s progressive agenda.  It will mean significant changes in the thrust of domestic and international policies.  However, the many checks and balances in Washington, including the important role played by Congress and the various government agencies, will result in far less radical changes than many fear.


Markets often react—and over-react—before they think through the fundamental issues.  Looking forward, much of Trump’s erratic and offensive campaign rhetoric will be tamed.  Some of his outlandish ideas have zero chance of being implemented.  Congress will force Trump to greatly modify and rationalize his tax and spending policy promises and will prevent enactment of any legislation that significantly increases budget deficits.  

Following the markets’ initial negative response, global portfolio managers will refocus on the fundamentals, come to recognize that new policies will not unhinge the economy--and may help it--and recognize investment opportunities.  Valuations will rebound.  

2) Now that Trump is President-elect, his posture will be much more diplomatic.  His public speeches will be closely managed.  He will be less prone to erratic and off-the-cuff remarks.  Every President-elect assumes the role of President and starts to behave Presidential.  If this assessment proves wrong and Trump continues to conduct himself in a brash and erratic manner, uncertainties will persist, which will sustain market volatility and forestall any forward movement in Trump’s policy initiatives. 

Trump will have a lot to learn about policies, the policy-formation process and Washington.  He enters as a Washington outsider without a deep knowledge of the policies.  In contrast, Clinton is an insider and Washington insiders had prepared her entire platform in detail.  Trump must create a transition team that adds details on the programmatic changes to the initiatives.

There are 100s of thousands of government officials in Washington that effect and implement laws and steer the policy process.  This bureaucracy and the role of the President will force Trump to moderate and transform.

3) The Congress and Congressional leadership will provide important checks and balances on Trump’s proposals, particularly in tax and spending policies.  The Republican leadership—in the House led by Paul Ryan, Ways and Means Committee Chair Kevin Brady and Budget Committee Chair Joe Price generally favor pro-growth tax reforms—including many of the initiatives in Trump’s platform—but they are also fiscal conservatives that will lean hard against proposed legislation that would materially increase budget deficits.  

Deficits have receded to 3% of GDP, benefiting from 7+ years of economic expansion, but projections of deficits and government debt soar under current law.  The Congressional legislative process on spending and tax policies will be deliberate and constrained by budget realities.  There will be political squabbles about how the Congressional Budget Office - the official budget scorekeeper - measures the impact of different proposed spending and tax policy changes on budgets.  This process will result in spending and tax changes that are greatly modified from Trump’s campaign promises.

4) Spending proposals.  Trump has proposed sizeable increase in spending in areas like infrastructure (this was actually mentioned in Trump’s acceptance speech), War Veterans (full access to Medicare providers), defense and national security.  He proposes significant cost savings in other government programs, but has not been specific.  Historically, cost savings have been hard to actually achieve.

Trump has proposed repealing the Affordable Care Act (ACA), but there is zero probability of Congress approving this without a viable substitute.   Congress will seek changes that will improve the efficiency of health care infrastructure coverage and medical costs, but an outright repeal is not in the cards.  Several alternative modifications will get close attention.  It is likely new legislation will allow interstate competition among health care insurers.  This will be attractive to both political parties; for political reasons, the Obama Administration prevented it.  Also, Trump has proposed legalizing the importation of select pharmaceuticals from Canada.  Democratic candidate Bernie Sanders also proposed this, so it may be accepted as a viable way to generate competition and reduce the costs of pharmaceuticals.

5) Tax policy. Trump has proposed tax reduction for individuals and estates and corporate tax reform.  On individual taxes, Trump recommends lower individual income tax rate with fewer brackets and elimination of the Alternative Minimum Tax, elimination of the 3.8 percentage point surtax imposed by the ACA, and a significant reduction in the value of deductions. According to Trump’s platform this would involve eliminating loopholes for wealthy tax filers. 

Trump proposes no changes to taxes on dividends, leaving them at 20% and keeping the tax on capital gains at 20%, while lowering capital gains taxes on lower income households.

Trump proposes significant corporate tax reform that would involve a sharply lower rate and a broader tax base, and also a one-time 10% tax on repatriated corporate cash held overseas. However, Trump’s platform does not include any of the programmatic details on how deductions, deferrals, exemptions and credits would be changed in order to broaden the corporate tax base. These are critically important details that would be required to transform a campaign platform initiative into viable legislation.   

Congress will require that any fiscal proposal involves spending and tax provisions that make sense, add up, and do not have a significant impact on budget deficits and projected debt. Congress would reject any spending increase proposal that is not accompanied by tax increases. Regarding corporate tax reform, Congress will push for a combination of rate cuts and base broadening that are close to, or near, deficit neutrality. 

The Congressional Budget Office, the official budget score keeper for Congress, will estimate the budget impacts of the various legislative proposals over a 10 year projection period.  Its estimated procedures will have a significant impact on policy deliberations and come under close scrutiny.

The bottom line is, that while the Republican-controlled House and Senate favor pro-growth tax reform, they are also fiscal conservatives who will push back on legislation that would raise deficit and debt projections. As a result, Congress’ checks and balances will play a critical role in modifying and shaping tax and spending policies.   

6) If President-elect Trump is able to work with Congress and enact a fiscal package that includes more infrastructure spending and corporate tax reform, it would boost economic growth and longer-run potential growth. In light of the Congressional legislative process, the serious budget constraints and normal Washington politics, enactment is likely to be some time in the future and the size of the program might be reduced because of budget concerns.  As described in our earlier report on infrastructure, expect any legislation to be wide-ranging and focus more on longer-term projects (with delayed actually spending) aimed at raising productive capacity rather than spending quickly on shovel-ready projects (see US infrastructure spending – a roadmap for thinking broadly, October 24, 2016).

7) In his platform and while campaigning, Trump is favored fewer government regulations, but does not provide and specific details. This would be an extremely important initiative with direct impacts on efficiencies in business production and operating costs as well as the mobility of labor, but several caveats are appropriate:   the web of regulations is complex and often in the “fine print” that requires a whole bunch of minor changes to make a material macroeconomic impact, and also, the web of regulations is as onerous on the State and Local levels as it is on the Federal level.  Nevertheless, Presidential appointments to the Department of Labor, Environmental Protection Agency, the International Trade Commission and the like are very important.

8) Trump has said that he would like to revamp the Federal Reserve. Trump may criticize the Fed and Chair Janet Yellen, but Yellen is expected to remain as Chair through the end of her term in February 2018. While Yellen may come under pressure, she knows that resigning would be damaging to the Fed’s independence and credibility. 

There are currently two vacancies at the Fed’s Board of Governors. Trump will nominate 2 new governors who are expected to be open to the idea of more rules-based policy rather than the current discretionary policy approach employed by the Fed. The Senate Budget Committee, led by Chairman Shelby, is likely to proceed quickly with confirmation hearings (Senator Shelby has postponed nomination hearings of President Obama’s 2 nominees until the Fed appoints a Vice Chairman from bank supervision as required by Dodd Frank).  Several current Fed Governors may opt to retire.  A primary candidate is Dan Tarullo, who leads the Fed’s efforts on bank supervision and the stress-testing of the large banks.  This would provide more openings for new Governors.

In recent years, the Fed has come under increasing pressure from both sides of the political aisle in Congress, for different reasons. The new Congress, spurred on by the Trump administration, is likely to hold hearing on initiatives that would enhance and improve Congressional oversight of the Fed.  In these hearings, there may be an impetus toward instituting more rules-based policy at the Fed. The Fed rejects such an approach. It will argue strenuously against any change to the Fed’s organizational structure and operations.  However, this debate would not affect the timing of the Fed’s interest rate changes.  

Expect the Fed to proceed with its rate hike in December.

9) International affairs. Trump will learn quickly that international affairs are very complex and he will quickly come to rely on the various government agencies and experts that understand and influence the US’ approaches on international affairs. This will serve to soften some of his brash statements during the campaign.  

No changes are expected to the US’s relationships with either the European Union or the United Kingdom.  The Trump Administration is expected to express the importance of maintaining strong relations and trade with both the EU and the UK, but no new trade agreements are expected.  

Other campaign statements will fade, with no material follow through or implementation.  No dramatic change is expected on the US role in NATO.  No wall will be built between Mexico and the US.

The Trump Administration is expected to pursue a tougher stance on diplomatic and trade relations with Russia than has been pursued by the Obama Administration.

Trump’s approach to China is uncertain, however, and potentially troubling. He has said that he would identify China as a “currency manipulator.” Although this makes little sense in the current situation, it could add a lot of uncertainty. Trump has also proposed high tariffs on imports from China. Congress would block this initiative; the Senate Finance Committee and the House Ways and Means Committee have jurisdiction over tariffs and quotas. More likely, the Trump Administration could influence US trade with China – and erect some barriers – through changes in the fine print on agreements. 

China and Mexico are two of the US’s largest trading partners. Neither wants to enter a trade war with the US, and neither can afford to do so. The US relies heavily on imports from those partners. Current concerns about major trade barriers being erected are over stated and not realistic.

10) The quick market reaction in stocks and the fall in the US dollar will be reversed as the market comes to acknowledge that the checks and balances in Congress and government offices will smooth out (most of) Trump’s rough edges.  Current fears of crazy, destabilizing legislation and international initiatives are overblown.  Eventually, policies may emerge that lift economic growth.  The Fed will proceed to raise rates very gradually toward their new normal level and bond yields will rise but only modestly relative to historic levels.  There is a history of market over-reactions to regime shifts and subsequent reversals.  The biggest lasting changes in response to Trump’s victory will be in Washington, not in financial markets.

Kallum Pickering: What President Trump means for the European economy

US economic policy matters for Europe: US households are the global consumers of last resort. They can shape global trends for the better or for the worse, as the US boom until 2007 and the subsequent burst have shown. Trade-dependent Europe benefits from a strong and open US economy. On 20 January 2017, Donald Trump will enter the White House. While markets have, at least so far, taken his victory in their stride, it remains to be seen just what his presidency will mean for US economic policy and global economic trends. What parts of the mandate that got him elected will see the light of day? What parts will be watered down, decontaminated or even pronounced dead on arrival by the checks and balances of Washington? 

Pro-growth economic policy = good news: Europe would directly benefit from an increased dynamism that would come from any policies that raise US trend growth. Trump’s promise to vastly expand infrastructure spending and reduce taxes is likely to get trimmed down significantly by the fiscal hawks among the Republicans in Congress, who will lean against any attempt to let deficits rise too much. Do not expect a Ronald Reagan-style impact. But a more expansionary fiscal stance plus some supply-side reforms to improve competition and slim down burdensome regulation, such as allowing interstate competition among health care insurers and legalising the imports of some Canadian pharmaceuticals, could support private investment and household consumption. 

A less open US = bad news: Europe earns almost 20% of its GDP from exports, that is 50% more than the US. European producers would feel the pinch of a more inward-looking and less trade-oriented US. A US shift towards isolationism over the next four years that might then be mirrored by other countries is the major economic risk for Europe following the Trump victory. If Trump does what he said in the campaign, namely brand China as a currency manipulator and place a 45% punitive tariff on Chinese imports, he could trigger a trade war. While Congress would block many of his more extreme policy proposals, such a move would badly exacerbate a tilt in the Western world against globalisation. Trade oriented economies like those of Europe would lose even more from that than the US. 

The Fed under pressure = mostly irrelevant. While Trump may publicly criticise the Fed and threaten more oversight, it probably will not impact Fed policies much. The Fed will continue to set policy in relation to US economic conditions and the outlook for inflation. Whether appointed by a Democratic or a Republican president, Fed members tend act independently once in office. They will always weigh the outlook for US growth and inflation upon setting Fed policy, learning by experience and adjusting their stance if it turns out that they may have been too accommodative or too restrictive in past decisions. The impact on Europe of any temporary tilt in Fed policies coming from potentially hawkish Trump appointees to the chair and board of the Fed would likely be limited and temporary. 

Brexit then Trump – who is next? Markets will watch European elections even more closely than before after both Brexit and Trump defied the best predictions of the pundits and polls, adding to market nervousness. While victories for populists in the US and UK create serious uncertainty, the potential consequences of a populist victory in a major Eurozone economy could be far worse. It could pose a threat to the cohesion of the Eurozone. Markets could react badly if the likely referendum loss by Matteo Renzi on 4th December were to usher in a period of protracted uncertainty followed by early new elections. In France, the odds of an upset victory for far-right Marine Le Pen in the second round of the presidential elections on 7 May 2017 still look slim, as discussed in our Chart of the Week.  Risks don’t always materialise. So far, the Eurozone has managed to dodge all the major risks that cropped up in the last few years. 

Präsident Trump

Donald Trump wird der 45. Präsident der Vereinigten Staaten. Gleichzeitig haben die Republikaner ihre Mehrheit in beiden Häusern des US Kongresses verteidigt. Wie im Falle des britischen Votums für einen Ausstieg aus der Europäischen Union am 23. Juni 2016 weicht das Ergebnis der US-Präsidentschaftswahl um etwa vier Prozentpunkte ab vom Durchschnitt der Meinungsumfragen unmittelbar vorher. Es trifft deshalb Finanzmärkte und Wirtschaft als erhebliche und weitgehend negative Überraschung.  

Welche Folgen das Wahlergebnis letztlich haben wird, lässt sich nicht einmal ansatzweise abschätzen. Die tatsächliche Politik, die ein US-Präsident verfolgt, weicht oftmals erheblich ab von den Wahlversprechen ab. Dazu kommt, dass Donald Trump – mit wenigen Ausnahmen – bisher vor allem durch eher allgemeine und großspurige Äußerungen aufgefallen ist, statt konkrete Vorschläge zu machen. Allerdings gibt es zumindest Anlass zur Sorge, dass es gerade in der Außen- und Außenwirtschaftspolitik ungemütlich werden könnte. Die dreißiger Jahre mit ihrem verheerenden Aufstieg des politischen Populismus und wirtschaftlichen Protektionismus sind bisher nur ein Echo. Aber es ist nicht mehr ganz so schwach wie zuvor.

Der Wahlsieg Trumps drückt den Unmut vieler Bürger gegen das „Establishment“ aus. Darin spiegeln sich auch die wirtschaftlichen Verwerfungen wider, die der rasche Aufstieg Chinas mit sich gebracht hat, die Umwälzungen am Arbeitsmarkt durch neue Technologien, die vor allem traditionelle Beschäftigungsmöglichkeiten weniger qualifizierter Arbeitskräfte treffen, und die hohen Kosten der großen Finanzkrise der Jahre 2008/2009. Bisher hat der wirtschaftliche Aufschwung in der westlichen Welt nicht ausgereicht, diesen Unmut zu dämpfen.

Nach dem Brexit ist dies bereits die zweite wichtige Abstimmung in der westlichen Welt in diesem Jahr, in der sich die Gegner einer liberal-offenen Gesellschaft offenbar durchgesetzt haben. Dies wirft ein Schlaglicht auf kommende Abstimmungen auch in Europa, beispielsweise auf das Verfassungs-Referendum in Italien am 4. Dezember, bei dem das politische Schicksal des italienischen Reform-Premierministers Renzi auf dem Spiel steht.

Was darf der US-Präsident?

Das politische System der USA zeichnet sich dadurch aus, dass die Macht einzelner Personen und Ämter beschränkt ist. Die „checks and balances“ sorgen in vielen Bereichen für einen Zwang zum Kompromiss – oder eben dafür, dass weit weniger geschieht, als vorab angekündigt. Das gilt vor allem für nahezu die gesamte heimische Wirtschafts- und Finanzpolitik. Der Präsident kann zwar Gesetze vorschlagen und durch ein Veto blockieren. Verabschiedet werden Gesetze aber vom Kongress. Das gilt auch für den Bundeshaushalt mit nahezu allen Entscheidungen über Staatsausgaben und -einnahmen. Beispielsweise kann der Präsident nicht anordnen, eine Mauer an der Grenze zu Mexiko zu bauen. Das würde Geld kosten, das nur der Kongress bewilligen könnte. Mexiko wird die Mauer sicherlich nicht selber bezahlen. 

Außen- und Außenwirtschaftspolitik im Fokus

Dagegen sind die Befugnisse des Präsidenten in der Außen- und Außenwirtschaftspolitik groß. Allein Worte des Präsidenten können hier Tatsachen schaffen. Sollte Trump beispielsweise das gegenseitige Beistandsversprechen in der NATO tatsächlich an die Bedingung knüpfen, dass dies nur für Staaten gelte, die seiner Ansicht nach genügend für Verteidigung ausgeben, könnte dies das Abschreckungspotenzial der NATO schwächen. Zumindest im Wahlkampf hat Trump sich zweimal entsprechend geäußert. Damit könnten Sorgen zunehmen, dass zum Beispiel der russische Präsident Putin sich zu weiteren militärischen Abenteuern à la Ukraine ermutigt fühlen könnte.

Auch in der Außenhandelspolitik spielt die Exekutive in den USA eine große Rolle. Sie handelt Abkommen mit anderen Staaten aus. Sie kann zudem ein Land als „Währungsmanipulator“ brandmarken und dieses Land dann mit Strafzöllen belegen. Im Wahlkampf hat Trump mehrfach damit gedroht, als eine seiner ersten Amtshandlungen genau dies gegenüber China zu tun, und zwar mit Strafzöllen von 45 %. Gleichzeitig hat er angekündigt, dass er das bestehende Freihandelsabkommen zwischen den USA, Mexiko und Kanada neu verhandeln  und – falls dies nicht gelingt – mit der vertraglich vorgesehenen Frist von zwölf Monaten kündigen möchte. 

Risiken gerade auch für Deutschland

Ein Streit zwischen den USA und Mexiko wäre für Europa nur von geringer Bedeutung. Aber ein Handelskrieg zwischen den wirtschaftlichen Großmächten USA und China könnte die Welthandelsordnung erschüttern. Gerade Deutschland und andere ausfuhrorientierte Staaten Europas sind mehr als die weniger ausfuhrstarken USA darauf angewiesen, dass die Regeln des Welthandels eingehalten werden. Sowohl in der Außenpolitik als auch in der Au-ßenwirtschaftspolitik steht deshalb für Europa und einige andere Partner der USA mehr auf dem Spiel als für die USA selbst. Dazu kommt das Risiko, dass eine protektionistische US-Politik wie in den schrecklichen Jahren nach 1929 Schule machen könnte. Bisher hat die westliche Welt nach der großen Finanzkrise von 2008/2009 keinen ernsthaften Protektionismus zugelassen. Dies ist ein wesentlicher Grund dafür, dass wir uns seit Jahren eines zwar verhaltenen aber doch stetigen Aufschwungs erfreuen. Sollte es zu einer Welle protektionistischer Maßnahmen der USA und anderer Länder kommen, würde dies die Wachstumschancen Europas und gerade auch Deutschlands einschränken. Dass die USA unter einem Präsidenten Trump das fertige Handelsabkommen mit elf anderen Anrainerstaaten des Pazifiks (TTP) ratifizieren werden, erscheint nun unwahrscheinlich. Die Chancen für ein Freihandelsabkommen zwischen den USA und der Europäischen Union (TTIP), das gerade Deutschland immense Vorteile versprechen würde, sind sehr gering. 

Folgen für die Wirtschaftspolitik in den USA

In der US-Binnenwirtschaft ist der Einfluss des US-Präsidenten vergleichsweise gering. Abgesehen von Vorschlägen an den Kongress kann der Präsident vor allem Regulierungen erlassen und aufheben.

Trump hat im Wahlkampf für sich damit geworben, dass er einige Teile der US Wirtschaft stärker deregulieren und einige Steuern senken möchte. Zudem verspricht er erhebliche Mehrausgaben gerade für die oftmals marode Infrastruktur. Für sich genommen könnten diese Ideen die Wachstumskräfte der US-Wirtschaft auf Dauer etwas stärken. Allerdings rechnen sich Trumps Vorschläge nicht einmal ansatzweise. Anders als Trump selber wird der US-Kongress wahrscheinlich darauf bestehen, dass die Vorschläge für niedrigere Steuern und höhere Ausgaben zu einem erheblichen Teil gegenfinanziert sind. Nach einigem Hin und Her dürfte deshalb am Ende ein eher moderates Fiskalprogramm mit einigen Steueränderungen und einem langsamen Anstieg der Ausgaben für Infrastruktur herauskommen. Die US-Fiskalpolitik wird damit wohl leicht expansiv. 

Mit Glück könnten sich aus einem Zusammenspiel zwischen Trump und einem republikanisch geprägten Kongress einige Initiativen ergeben, die letztlich die US-Wirtschaft etwas stärken könnten. Insgesamt überwiegen jedoch bei weitem die Risiken, dass ein um sich greifender Protektionismus und eine mögliche Neigung Trumps, immer wieder durch Subventionen einzelne Arbeitsplätze zu retten, statt eine wachstumsfreundliche Wirtschaftsordnung zu stärken, auf Dauer die Wachstumskräfte in den USA spürbar schwächen könnten.

Folgen für die US Fed

Die US Federal Reserve befindet sich in einer unangenehmen Lage. Im Wahlkampf hat Trump mehrfach die Vorsitzende der Fed, Janet Yellen, hart kritisiert. Trump will höhere Zinsen, obwohl dies den US-Aufschwung nach Ansicht vieler Beobachter dämpfen könnte. Sollte es zu anhaltenden Finanzmarktturbulenzen mit negativen Folgen für die Konjunktur kommen, könnte dies allerdings die US Fed jetzt sogar dazu veranlassen, auf ihre eigentlich geplante Zinserhöhung am 14. Dezember doch zu verzichten.

Die Amtszeit von Yellen läuft im Februar 2018 aus. Bis dahin wird sie – trotz möglicher Aufforderungen von Trump – wohl nicht zurücktreten. Danach wird Trump aber sehr wahrscheinlich den Vorsitz der Fed nach eigenen Wünschen neu besetzen. Zudem dürfte er bereits unmittelbar die Vorschläge von Präsident Obama, um die beiden freien Posten im Zentralbankrat zu besetzen, durch seine eigenen Vorschläge ersetzen. Der zuständige Senat würde diese Vorschläge vermutlich absegnen.

Auswirkungen auf die Finanzmärkte

Märkte mögen keine Unsicherheit. Der weitgehend unerwartete Sieg Trumps dürfte an den Märkten eine gewisse Flucht in sichere Häfen auslösen, vor allem in Staatsanleihen von Ländern mit hoher Bonität wie den USA und Deutschland. Die Absetzbewegung aus Risiko-Titeln könnte besonders auch Schwellenländer treffen. 

Ob die erste Reaktion der Märkte dauerhaft sein wird, hängt vor allem davon ab, welche Signale Trump in den kommenden Wochen sendet. Bleibt er bei seiner harschen Wahlkampf-Rhetorik, die erhebliche Erschütterungen für die Weltpolitik und den Welthandel erwarten lassen könnte? Oder mäßigt er sich angesichts der Realität, dass auch er letztlich als US-Präsident mit dem eigenen Kongress und den Verbündeten der USA zusammenarbeiten muss? Leider bleibt es spannend.


Having won key swing states, Donald Trump will probably be the next US president. At the time of writing (06:15h GMT), Trump is ahead of Hillary Clinton by 244 to 215 votes in the electoral college. 270 votes are needed to win. Trump is also slightly ahead in the popular vote by 48.2% to 47.1% according to CNN. Results available so far indicate that the Republicans have won the Congressional elections, keeping a significant majority in the House of Representatives and winning the Senate as well. The discussion below is a “what if” exercise based on the assumption that the outstanding results will not change what seems to be the likely election outcome.


  • Donald Trump’s apparent victory comes as a significant surprise as Hillary Clinton had been modestly ahead in almost all opinion polls before.
  • After the UK vote for Brexit on 23 June, this is the second major upset victory for anti-establishment populists in the Western world this year. It does not bode well for votes to come elsewhere, including some key votes in Europe. The echoes of the populism and protectionism of the late 1920s and 1930s are still faint, but they are now a little less faint than before.
  • Trump’s outspoken and erratic behaviour during and before his election campaign raises serious concerns that he may upset US foreign policy, weaken NATO and brand China as a “currency manipulator” in a prelude to a potential trade war against China. If so, this would matter more for Europe than the US. Europe needs a firm commitment to NATO to deter further attacks of Russia’s Putin on neighbouring countries and is heavily dependent on world trade and hence on respect for the rules that underpin world trade.
  • The US has had controversial commanders-in-chief before. In Europe, Ronald Reagan had been widely perceived as a risk to peace before he came to office. He turned out to be one of the more successful US presidents instead. However, Reagan had been an accomplished governor of California first whereas Trump has no executive experience in public office. Also, Reagan represented the sunny optimism of hope rather than the politics of anger espoused by Trump. Whether the concerns about president Trump will turn out be vastly overdone will be impossible to know for a while.
  • US politics is a system of checks and balances. For most issues, a president has to work closely with Congress that passes laws and makes tax-and-spending decisions. The powers of the president are strongest in foreign policy, some aspects of trade policy and domestic regulations.
  • Because of his somewhat erratic behavior, a lack of detail in his policy platform and fiscal promises that simply do not add up, projecting what a president Trump may really get done is difficult.
  • Once elected, US presidents frequently get side-tracked or run into political obstacles and tend not to follow their campaign platforms. Political compromise and the heavy weight of the Washington bureaucracy dilute proposals. But whether a more presidential and diplomatic Trump will emerge is an open question, to put it mildly. It is part of the period of elevated uncertainty.
  • Having won on election promises that will be virtually impossible to keep, Trump runs the risk that his voters may be seriously disappointed by the very meagre results, if any, that he may be able to deliver. The US policy debate could remain rancorous as a result, to phrase it in a charitable way.
  • Whereas some of his regulatory and tax proposals could strengthen the US supply side somewhat, Trump’s strongly protectionist leanings could significantly damage US trend growth in the US and some of its trading partners over time. It could also set a bad example for other countries.  
  • If financial markets tank badly for a protracted period of time and if uncertainty weighs on economic indicators, the question whether the Fed will raise rates in December would be more finely balanced. 


Trump will arguably move to the White House as one of the most divisive presidents ever. He seems to be highly controversial even among a chunk of traditional Republican voters and, even more so, among many Republican members of Congress. 

A Republican-controlled House of Representatives will pose many challenges and obstacles to the enactment of Trump’s economic initiatives. While the Republican leadership favors tax reform, it also tilts decidedly toward fiscal responsibility and would be tough on legislative proposals that would increase budget deficits. The result would be a significant moderation of Trump’s policy initiatives.

Many of Trump’s economic proposals lack programmatic details and his budget numbers either do not add up or they are based on very optimistic growth projections and outsized economic responses to proposed changes in policies. Trump’s proposal for corporate tax reform calls for a sharply lower tax rate and broader base, but provides insufficient details on how the base would be broadened. The Republican-controlled House would force Trump to moderate his tax and spending initiatives, provide programmatic details in place of the gaping holes in his current proposals and require that the budgetary numbers add up and not generate substantial increases in deficit projections. The Congressional Budget Office’s scorekeeping of the proposals and Congress’s assessment of what is an acceptable path of deficits are critically important. 


A moderate increase in infrastructure spending seems on the cards. This will extend well beyond “roads and bridges” and include air traffic control systems, the electrical grid, transportation systems and ports, oil and gas pipelines, cybersecurity and a wide range of public goods (see US infrastructure spending – a roadmap for thinking broadly, October 24, 2016). Moderate increases in defense spending seem likely. Increasing spending for infrastructure and defense upgrading would involve fiscal stimulus and add directly to government purchases and GDP, as well as private sector employment. The legislative process on such fiscal initiatives will involve a wide array of Congressional appropriation committees as well as the budget and finance committees. In light of their comprehensive nature, policy deliberations may be lengthy, and immediate enactment should not be expected. 


Trump has emphasised in his election campaign that he would seek to substantially renegotiate the NAFTA trade agreement with Mexico and Canada – and perhaps even abrogate it with a six-month notice if he doesn’t get his way. Whether or not he could actually do so without a vote in Congress seems to be an open question which the Supreme Court may have to rule upon. That he will ask Congress to ratify the TPP agreement between the US and 11 other Pacific rim nations or negotiate a TTIP trade agreement with the EU looks highly unlikely. Instead, the election victory of Trump could exacerbate what so far has been a rather restrained trend towards more protectionism in the Western world. The result will be slower potential growth.


As long as the post-election uncertainty does not morph into a major economic calamity, the Fed may still raise interest rates by 25bp on 14 December 2016. If the economy stays on track, we would look for two further such rate hikes each in 2017 and 2018. Gradual gains in wage inflation and a likely modest fiscal stimulus to come support the case for a cautious scaling down of the Fed’s monetary stimulus. But the outlook is now in more doubt than before.

Trump has called for a change in leadership at the Fed. This may now raise big concerns in financial markets and at the Fed. However, Janet Yellen’s 4-year term as Chair runs through February 2018. While Trump could ask Yellen to step down or publicly criticise her leadership at the Fed, she would not be required to resign. We expect her to choose to serve out her term as Chair even under adverse circumstances. The costs of doing otherwise may jeopardise the Fed’s credibility as an independent central bank. 

There are currently two vacancies in the Fed’s Board of Governors. President Obama has nominated two candidates to fill the posts, but the Senate Banking Committee (SBC) has postponed confirmation hearings until the Fed appoints a Vice Chair of Supervision as required by the Dodd-Frank act. Trump will almost certainly nominate two different candidates. If Republicans indeed maintain control of the Senate, the SBC would quickly hold hearings and likely confirm the nominees.

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