How Donald Trump and the Fed Will Affect the Economy

Trump and the Fed Upward Pointing Dollar Bill
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As President-elect Donald Trump begins to assemble his cabinet and gets up to speed on the state of the union, many investors are beginning to wonder how Trump and the Federal Reserve will fare working together. More importantly, they’re wondering what effect his presidency will have on the markets. The jury is still out on issues like what he’ll do about NAFTA, but we have a pretty good idea of how Trump and the Fed will interact. Let’s start with the current economic situation.

How the Fed Handled 2016

In 2015, Fed chairwoman Janet Yellen announced that they’d be raising the interest rate slightly despite reluctance to do so.  However, according to US News, many officials at the beginning of 2016 thought that they’d raise the rates four times. This didn’t happen.

The economy didn’t improve as expected, and Brexit didn’t further encourage any rate hikes towards mid-2016. However, the Fed will convene on December 13-14 to determine if there will be at least one interest raise this year. There’s only one thing currently on the horizon that could change their plans: how the presidency will affect Trump and the Fed. According to the New York Times:

“Mr. Trump’s election was viewed as one of the few developments that might throw a wrench into the works. The Fed, which started the year predicting that it would raise rates four times, has instead left rates untouched in a range between 0.25 percent and 0.5 percent. The low rates are intended to stimulate economic activity by encouraging borrowing and risk-taking. If financial conditions tighten in the coming weeks, or volatility rises, the Fed might decide to delay a rate increase again.”

That might not be a truly fair assessment, though. Trump has been outspoken about the Fed’s hesitancy with interest raises, but his changes could turn out to be less drastic than people previously believed.

How Donald Trump Feels About the Fed

Throughout the campaign, Trump didn’t hide his disdain for the Fed or the fact that they embody the government controlling American finances. That includes Yellen. On Nov. 3, 2015, he said:

“Janet Yellen is highly political and she’s not raising rates for a very specific reason, because [President Barack] Obama told her not to, because he wants to be out playing golf in a year from now and he wants to be doing other things and he doesn’t want to see a big bubble burst during his administration.”

However, there have been times when Trump has favored low interest rates, acknowledging that they do indeed help the economy.  According to former vice chairman of the Fed, Donald Kohn:

“We’ve heard two Donald Trumps. One said he likes low rates and he would await pretty definitive evidence of inflation before raising rates. The other Donald Trump is the one who railed against bubbles and thought the Federal Reserve was playing a political game and clearly seemed to favor higher interest rates.”

As with many of Trump’s other proposed policies, it’s best that people wait and see what will happen. Even the president-elect has acknowledged that he’s learning more and more about the job, and he may gain some insight into the Fed’s inner workings and decisions.

One issue Trump likely won’t backtrack on is the status of Yellen as Fed chair. He’s been very outspoken about how poor of a job he thinks she’s done, but the more likely reason for her term to not be renewed in January 2018 is simple: the party will want a Republican in her spot. Despite his criticism though, it’s widely thought that Trump will at least let Yellen finish out her term before moving on to a new Fed chair.

How Fed Chairwoman Janet Yellen and the Fed Feel About Trump

The Fed is fairly mum on political issues, even though it is a government organization. This is an important facet of the discussion that is not to be forgotten. As JP Morgan Chase U.S economist Michael Feroli explains:

“While fiscal and economic policy uncertainty has increased, it would be a challenge for Fed rhetoric to maintain an aura of being above the political fray if that were the only rationale for not moving next month.”

However, Yellen has tried to get Congress involved in helping the country’s economic status. In her first public comments following the election, Yellen told the Joint Economic Committee of Congress:

“We don’t know what’s going to happen. There’s a great deal of uncertainty. We will be watching the decisions that Congress makes and updating our economic outlook as the policy outlook becomes clearer.”

It sets a good example for the rest of the country- it’s time to wait and see what happens with Trump and the Fed.

What to Expect From Trump and the Fed

The only surefire way to know what will happen is to observe how the Trump administration’s ensuing policies will affect our nation. However, some people are making projections about specific ways his team will change the economy. Stephen Auth, chief investment officer for equities at Federated Investors, explained:

“His market-positive agenda will begin to emerge and, with a Republican Congress behind him, the potential for many of these policies to become law is high.”

New York Times writer Binyamin Appelbaum takes it a step further, explaining:

“The president-elect has promised to stimulate faster economic growth with measures that include a large tax cut and as much as $1 trillion in spending on infrastructure. He has also promised new barriers to imports, which could drive up inflation. Economists appear deeply divided on the impact of such policies.”

We are just under two weeks away from Yellen and the rest of the Fed convening to talk about the status of our current economy, as well as the future. We can trust Trump and the Fed will do their best to ensure we continue on the path of progress — including lower unemployment rates — we’ve been on.

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