Trump And Powell – Best Mates Or Strange Bedfellows?

Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.

Trump And Powell – Best Mates Or Strange Bedfellows?

Whilst the debate on what impact tax cuts will have on the US economy continues, some feel fiscal (tax) initiatives work best when economies need this type of boost to dig them out of recession. In this respect they feel the timing is wrong.

The reduction in corporate taxes enacted by Trump will reduce the US government’s income and most likely increase the deficit. The extent of the deficit will be dependent on the degree to which the authorities in charge can improve on an economy which is already doing well.  If stronger economic growth does come through then inflation may accelerate leaving the authorities with a dilemma; let things run on or take stronger action now?

Next week, Jerome Powell takes over from Janet Yellen as Chairman of the US central bank. He will begin his term with an economy at full throttle and unemployment at a low point. The challenge for him and the rest of the FOMC will be to balance growth and inflation whilst continuing the process of normalising monetary policy: raising interest rates without stifling economic growth.

The new Fed Chair will also have the challenge of managing the economy alongside Mr Trump’s political agenda. Trump has signed off on many new policies, tax cuts, trade reform and executive orders that will begin to shape the economy and impact consumer behaviour. Forecasting the true impact of Trump’s initiatives will be difficult and is likely to prove an ever-changing dimension for Mr Powell to consider. Powell, with a background in law and investment is seen as a safe choice, in favour of gradual rate hikes and a modest unwinding of the Fed’s balance sheet. However, his call for less regulation for small and medium-sized banks and for an overhaul of government housing finance agencies will bring into focus his intentions with the financial crisis still very clear in the memory of investors.

While Jerome Powell and Donald Trump have different jobs, they will both have the same objective. Keep the prosperity of the US economy healthy as it transitions into a new era of tighter monetary policy.

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