Trump’s Policies will Power the Economy in 2017, Yellen’s Policies will Steer It

Although the Fed’s December monetary policy statement made no mention of the effect of Trump’s policies on the country’s economic prospects, many experts have said that Trump’s plans for massive tax cuts and huge infrastructure investment could spur the economic recovery.

When asked whether the president-elect’s proposal influenced the projections of three more rate hikes in 2017, as opposed to previous indications of just two, Fed Chair Janet Yellen said there was some discussion in that respect.

“Some of the participants but not all of the participants did incorporate some assumptions of the change in fiscal policy into their projections,” Yellen said at her quarterly news conference.” That may have been a factor that was one of several that occasioned these shifts.”

Throughout his campaign, Trump said the Fed was supporting a “very false economy” by driving asset prices to what he described as unsustainable heights. Trump also criticized Yellen for not raising interest rates fast enough. At the same time, he argued that the Fed has little power to increase economic activity beyond Wall Street. This was another way of saying the Fed is encouraging excessive speculation.

On the matter of raising interest rates, Trump appears to have been spot on. Investors had expected a rate hike earlier in the year, but each time the central bankers found a reason not to raise rates including concerns about a slowdown in the Chinese economy, Brexit and the unpredictable U.S. presidential election.

During the campaign, it may have looked as if Trump and the Fed were light years apart, however, based on my assessment of the events on December 14, it looks as if Trump and Yellen have more in common than previously thought.

There is evidence that Yellen and other Fed officials have been in favor of fiscal stimulus for some time, and now it seems likely they will greet faster growth with relief.

In December, James Bullard, president of the St. Louis Fed, told reporters that Trumps victory, “… breaks gridlock in Washington, which has been a key complaint of how the economy operated.” Charles Evans, President of the Chicago Fed, said the prospect of increased infrastructure spending was “good news.”

Shortly after the election, I thought there would be a tremendous clash between Trump and Yellen and the Fed, but I have changed my opinion about the situation. I now feel that in 2017 we’ll see a president that will focus on fiscal policy while leaving the Fed to its devices.

Prior to Trump’s election, there was too much focus on the direction of monetary policy. In my opinion, this focus is going to shift. Trump is going to try to power the economy through growth-oriented structural reforms including reforms of taxes, trade, regulatory policy and energy policy, while the Fed is going to try to steer the economy through monetary policy and interest rate hikes.

If everything goes as plans, Trump will maintain his independence and so will the Fed, and that seems to have been the issue all along.