Figuring out the effects of the U.S. election on the American economy is no easy task, nor is explaining how fiscal and monetary policy affects economic performance. Still, your clients may be coming to you with questions about President-elect Donald Trump’s policies and, in relation, the likely path of interest rate increases south of the border.
A recent TD Bank research report offers some insight. TD’s outlook for the U.S. is “for real GDP to expand by 2.2% in 2017 and similarly in 2018,” without considering any new fiscal measures.
It adds, “An important element to this forecast is that the economy will outpace its trend rate of growth, estimated to be slightly under 2%. In other words, America is on track to reach full employment and the Federal Reserve to hit its 2% inflation target, no matter who [is] president.”
It’s easier, at this point, to predict what the U.S. Federal Reserve will do. The bank predicts the Fed will raise rates by a quarter-point this week, given “market probabilities of this outcome are pretty much 100% baked in.” Then, “going forward, the pace of rate hikes is expected to be a quarter-point roughly every nine months.”
Further, the report says, “[even though] there is little doubt that fiscal measures will play a more prominent role in the economy in the future, this does not imply that the central bank will be more aggressive with interest rates right off the mark. This is a better possibility for 2018 once the [fiscal] policy mix is known […].”
Another issue to consider is whether Trump, once he’s in office, “will embed a stronger Federal Reserve bias favoring higher rates, irrespective of fiscal outcomes.” The report notes Trump has criticized Fed Chair Janet Yellen’s leadership and the Fed’s dovish stance.
So, if clients ask, it’s fair to say there are many unknowns. Explain that there are several items to monitor for U.S. growth in the near-term means. Those include:
- current growth forecasts;
- whether U.S. fiscal and monetary policy developments alter those forecasts; and
- any impacts from global trends or events.
The 3 trends that will affect the economy in 2017, for more on Canada