Before last week’s presidential election the thinking among economic experts was that the Federal Reserve would be more likely to raise interest rates sooner — quite possibly in December — if Democrat Hillary Clinton was elected.
Republican Donald Trump, the theory went, would give the central bank — and financial markets — a scare because of campaign positions such as his opposition to trade deals the United States has made. Clinton would largely pursue Obama administration-like policies that would gradually lead to higher inflation and an urgency for rates to rise to keep it in check. Trump — well, who knows?
Now the thinking is that Trump’s ideas for spending as much as $1 trillion on infrastructure improvements and passing a large tax cut will spur the Fed to action fairly quickly if those proposals become bills and pass Congress. Both of Trump’s plans are likely to lead to increased inflation if they move forward; higher inflation is what the Fed has been waiting to see before it lifts rates from their rock-bottom position.
“I think his program will start delivering the kind of growth that [Fed policymakers] have been seeking,” Judy Shelton, a member of Trump’s economic advisory council, told the Los Angeles Times.
If inflation rises quickly under Trump’s policies, the Fed would be expected to raise rates at a pace believed necessary to restrain it, but the Times said that if he pursues the protectionist policies he championed as a candidate, prices on imports would rise and further add to inflation.
“The uncertainty factor is huge,” Diane Swonk, of DS Economics in Chicago, told the Times. “Higher tariffs would mean much more inflation, but lower growth. It would put the Fed between a rock and a hard place in terms of how to deal with that.”
It’s also unclear what Trump’s policy will be toward the central bank. He will be able to fill a majority of the seven-member Fed board during the next year and a half, including the seat of chairman Janet Yellen. Trump has sharply criticized her, saying her policies deliberately favor the Democratic Party and that she “should be ashamed of herself.”
The Fed is weighing a possible rate increase at its mid-December meeting, and vice chairman Stanley Fischer made it clear Friday that he is among those on the board who support slowly raising rates.
“The case for removing accommodation gradually is quite strong,” Fischer said in a speech by videoconference to a symposium sponsored by the central bank of Chile, MarketWatch reported.
He said the Fed is “reasonably close” to meeting its target of a stable 2 percent inflation rate and full employment, but he did not discuss the timing of any moves. MarketWatch said investors see a greater than 75 percent chance of a rate increase at the coming Fed meeting.
There were few reports last week to help guide the Fed or other economic decision-makers. The central bank said consumer credit rose in September by a seasonally adjusted $19.3 billion from the previous month, slightly more than expected. September’s 6.28 percent seasonally adjusted annual growth rate was a slowdown from 8.8 percent in August.
On Friday the University of Michigan’s preliminary Consumer Sentiment Index for November rose to 91.6, its highest level since the middle of the year and slightly above the average for the year.
“The recent gain in sentiment was driven by an improved outlook for the economy,” Richard Curtin, chief economist of the university’s Surveys of Consumers, said in a statement.
“The most striking finding in early November was that both near and long-term inflation expectations jumped to 2.7 percent from last month's record-matching lows of 2.4 percent. These increases must be replicated before they can be taken to indicate a troublesome development; thus far, the data has simply repeated the March 2016 peaks. Nonetheless, it may be viewed as added justification for next month's expected interest-rate hike.”
This week’s economic calendar is much busier. Today we will see the Commerce Department’s report on retail sales for October. Economists are predicting solid growth of 0.5 percent that would follow on 0.6 percent growth the previous month.
Reports on housing starts and building permits for October are due Thursday. Starts are expected to have kept a pace of 1.17 million, slightly above 1.05 million in September.
On Friday The Conference Board will reveal its Index of Leading Economic Indicators for October. The index rose 0.2 percent in September, and Ataman Ozyildirim, the board’s director of business cycles and growth research, said then that the economy appeared poised to continue to grow moderately through early next year.
The presidential election’s effects on consumer confidence won’t be measurable until the board’s Consumer Confidence Index for November and the final November report from the University of Michigan are released at the end of the month.
Will there be a “Trump effect” on holiday spending, and will it be a positive or negative one? We’ll be watching.