Donald Trump has clearly won the U.S. presidential election. With just over two months remaining, he will take over as the 47th president of the United States. The markets reacted optimistically, hopeful that the Republican’s economic policies will further fuel growth. Investors have seemed to overlook some potential risks. Wall Street hit a new record, a symbolic event for the markets. The question is, how long will this optimism last?
Trump is back in grand style. This is only the second instance of a “disrupted” presidency in U.S. history. Republicans can also rejoice in their Senate majority, which will undoubtedly assist them in appointing higher-ranking officials. Dominance in the House of Representatives is also possible. Therefore, Trump has a strong mandate from his voters to implement his economic agenda.
What the president-elect proclaimed on his campaign trail should, of course, be taken with a grain of salt, as it is unlikely that 100% will be realized. However, key issues are likely to be implemented rather quickly, starting with tariffs, which Trump sees as a kind of panacea. The general rate is 10%, but for Chinese goods, it is a whopping 60%. If implemented, the tariff rate in the U.S. will rise to an unprecedented level since the 1930s. Implementing rates for the Asian giant is realistic, the rest could have been part of a game and a tool for future trade negotiations. Another point is taxes, those imposed during his first term will expire at the end of 2025. The Republican has promised a natural extension and a decrease in corporate tax levels from 21% to 15%.
It is hard to imagine that tariffs could compensate for the lower revenues associated with taxes. It’s also tough to believe that taxes will become self-financing due to the effect of stimulating economic growth. There is a real risk that the U.S. budget deficit will deepen in the coming years. Tariffs are likely to stimulate domestic demand, but American companies will only be able to increase their supply to a limited extent. A total trade war would limit investment, therefore stifling overall economic growth.
A faster and more substantial effect can be expected in terms of inflation, which has been a struggle for the Federal Reserve in recent years. Naturally, there will be a rise in consumer prices in the U.S., resulting from increased import prices and a shift in demand toward domestic products. Entrepreneurs will naturally take advantage of the situation to increase their profit margins, costs that will largely be borne by the final consumer. However, the effects of this process will not be seen until the middle of the next year.
In his last conference after the FOMC meeting, Powell emphasized the Fed’s independence and the lack of influence the new political dispensation has on monetary policy. The Federal Reserve will have to respond appropriately to prevent this probable inflation boost from spiralling out of control. I’m not expecting rate hikes, but after about three cuts, it’s possible we’ll see a pause in further measures by spring.
Author: Łukasz Zembik, Oanda TMS Brokers
Source: https://ceo.com.pl/donald-trump-47-prezydentem-usa-rekordy-na-wall-street-i-pytania-o-przyszlosc-gospodarki-76426
