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Power Talks – commentary and updates from Friends First Chief Economist Jim Power
2016 will go down in history as one of the most momentous years seen in at least half of a century. Two political events have occurred this year, the full implications of which nobody really understands. However, both have the potential to fundamentally alter the global political and economic landscape.
Back in June the UK electorate unleashed a torrent of uncertainty by voting to exit the EU. The formal process has not yet commenced, but the political and economic dislocation it is causing is quite immense and we can be certain of more of the same over the coming months and years as the process is worked through. Brexit personifies uncertainty.
The election of Donald Trump as 45th President of the United States this week is a political event of similar if not greater magnitude. After all, Trump will become leader of the Free World in January, and the problem here also is that nobody knows what to expect. Trump has never held political office and will become the oldest person ever to assume the office. All we really know about Trump is what he expressed during what was a very fractured campaign against a Democratic candidate whom a large part of the electorate deemed to be deeply flawed.
The big question is if he will actually follow through on his policy pledges or if they were just empty promises made in the heat of intense political battle. To paraphrase another politician – one runs an election campaign in poetry and governs in prose. It remains to be seen if his term in office will be characterized by poetry or prose. Here’s hoping for more prose than poetry.
The key economic issues that Trump campaigned on are as follows:
In a nutshell, Trump’s campaign rhetoric was heavily driven by a desire to bring jobs back to America and strengthen the US economy.
At one level, with the Republicans now controlling the White House, the Senate and the House of Representatives, he could in theory be in a strong position to push his agenda through Congress. However, his policies are diverse and include elements that would both appease and horrify left-wing Democrats and right-wing Republicans. It promises to be a very unusual presidency, with the possibility of some very strange political alliances.
The market reaction to his victory was initially quite sharp, but following his relatively gracious and conciliatory acceptance speech, a strong sense of calm has returned to the markets. The dollar is modestly weaker and US and European equity markets are currently in modest positive territory. This is hardly the calamitous collapse that some had predicted.
The reality is that the markets are very unsure about how to react and nobody yet understands the full implications of his victory. Only time will answer that question. However, much will depend on the cabinet team that he puts in place and the emphasis that he places on the campaign promises that delivered a successful electoral outcome.
Just as is the case with Brexit, Trump’s victory has engendered a remarkable level of uncertainty and we can be sure that market volatility is likely to be a prominent feature of the landscape over the coming months. His victory is unlikely to push the US economy into recession, unless he adopts a very aggressive approach to policy making. However, it is possible that the Federal Reserve might just delay the interest rate increase that was virtually scheduled for December. The Federal Reserve will monitor market reaction to the election very carefully and would probably be reluctant to increase rates if there was any possibility that such a move would destabilize markets and ultimately the US economy.
For the Federal Reserve, the markets and the rest of us, it is definitely a case of wait and see.
The views and opinions expressed in this article are those of the author.