Donald Trump was elected US president on a strong platform of economic change – be it on taxes, interest rates or trade.
Trump campaigned for a strong fiscal boost to help kick-start growth, a departure from the traditional Republican stance. His victory speech – in which he promised to put millions of Americans to work rebuilding the country’s infrastructure – suggests this will be a key priority for his administration.
While few disagree US infrastructure needs an upgrade, this part of Trump’s policy platform could actually be the most difficult to implement. Republicans in the Congress will still need convincing that it’s worth increasing the budget deficit for more infrastructure spending.
Congressional Republicans are more focused on a tax revamp, especially lower tax rates for businesses and individuals. This does stand a chance of being implemented, along with an easing of the regulatory burden, but is unlikely to help US growth before 2018.
Expect trade tariffs to rise
When it comes to Trump’s trade policy, it is important to keep in mind that the Midwest ‘rust belt’ states were key to his victory. Wisconsin, for instance, had not voted Republican in any presidential election since 1984, but responded positively to Trump’s promise to revive US manufacturing.
It’s likely the Trump administration will end up raising trade tariffs to support US industry, but the effect may be weaker than the campaign rhetoric. Higher tariffs will probably push up the prices on imported goods and therefore inflation, especially by 2018.
Higher inflation is likely to lead to a tighter monetary policy than previously projected. Both Trump and Republican members of Congress have criticised the Federal Reserve (Fed) for not only keeping rates too low, but also for having too much discretion in terms of policy making. Fed Chair Janet Yellen may not be given a second mandate from 2018.
Rising interest rates risks undercutting Trump’s infrastructure drive
All things being equal, we should expect higher US interest rates. Meanwhile, new appointees to the Fed board could also revisit the current quantitative easing framework and decide that it’s time for the Fed’s balance sheet to return to more ‘normal’ levels.
A tighter monetary policy is not without risks, however – especially as US debt is at elevated levels, making the economy highly sensitive to tighter financial conditions. Rising interest rates also risks undercutting Trump’s infrastructure drive. This is one example of the several inconsistencies in the president-elect’s campaign promises.
The bold infrastructure programme that helped Trump get elected could end up in jeopardy when all the pieces of his economic policy are put together.