US: Faith in Trump, for now…

The financial market’s positive view of President Donald Trump’s economic policy platform has now spread to market and official economists alike. As a result, economic growth and inflation forecasts have both been revised upward, and the expectation is the US Federal Reserve will be raising official rates more than was seen in 2016.

The Minutes from December’s Federal Open Market Committee (FOMC) meeting demonstrated the more positive outlook, as its real GDP forecasts were revised slightly upwards for 2017 to 2.1%. The FOMC also noted in its press release that the path of its real GDP growth forecasts “...over the next several years was slightly higher, on balance, largely reflecting the effects of the staff’s provisional assumption that fiscal policy would be more expansionary in the coming years”. And indeed the minutes highlighted that “expansionary fiscal policy” was a key consideration in the Fed’s economic outlook.

Importantly this overall assessment led to FOMC members’ median interest rate expectation to be revised upwards for the first time since publishing its “Dot Plot” in 2011. The Fed is now expecting three interest rate hikes in 2017, as opposed to its previous forecast of two.

Market economists have followed suit. Before the US Presidential election the median forecast for growth stood at 2.1% over the twelve months to the December quarter 2017 – it is now 2.3%. CPI inflation forecasts for the same period were also revised up to 2.4%yoy, as were interest rate expectations.

There has also been a marked shift in economists’ perception of their own forecasts. As of January around 65% of economists thought there was upside risk to their central GDP growth forecast and 10% thought risks were balanced. This is in stark contrast to the just 19% of economists that thought there were upside risks before the election (average over the preceding 11 months) and 73% that perceived risks to the downside.

However it is arguable this outlook is too focused on near term policy initiatives that risk being delayed. Most notable amongst these are proposed reductions in corporate and personal taxation rates and significant increases in infrastructure expenditure – both key expansionary policies. By contrast there may not be enough focus on the growth-impeding anti-globalisation, anti-trade and anticompetitiveness policies which the new administration is also contemplating.

Balance of risks to surveyed real GDP forecasts
Less downside risks to the US economy?


Source: IFM Investors, Wall Street Journal Jan 2017 Economist survey.

What is evident in the initial stages of this new administration is that President Trump is intent on keeping true to his campaign pledges. This suggests that we should arguably be expecting some medium term downside risks to economic growth as these protectionist policies are formulated and implemented.