FX MACROECONOMICS
Tere are many unknowns, but the market seems to be anticipating lower corporate taxes, easier regulation, and better profits. It is also anticipating somewhat higher inflation and an accelerated timeline for gradual normalization of US monetary policy. During the campaign, P r eside n t - elect Trump was critical of Yellen and the Federal Reserve. Investors may be pleasantly surprised to find that in office, Trump will likely respect the independence of
the Reserve.
Trump will likely be able to mold the Federal Reserve into the central bank he wants.
There
are currently two vacancies on the seven-member Board of Governors. Of those, it is
assumed one will become the
Chair when Yellen’s term expires in February 2018. Vice-Chairman Fischer’s term ends in June 2018.
One of Trump’s initial appointments 16 FX TRADER MAGAZINE January - March 2017
speculation that Governor Brainard, who was thought to be a possible Treasury Secretary in a Clinton administration, may also step down. Te point is that within a little more than one year in office, Trump’s appointments could constitute a majority of the Board of Governors.
A trajectory of tighter monetary policy and looser fiscal policy is associated with currency appreciation
Federal
could be, as required by Dodd- Frank legislation, a Vice-Chairman for regulation (even if it is later replaced). This function has been filled by Governor Tarullo, who some expect to resign when the new role is filled. There is also some
In 2017, we expect Yellen to continue to normalize the Federal Reserve’s monetary policy. The December FOMC meeting resulted in a rate hike, and economic projections anticipate that three rate hikes would be appropriate in 2017. Tis is not a commitment, of course, and it does not include any potential changes to fiscal policy.
We would place the risk on the upside. The Fed’s objectives of full emp l o ymen t and 2.0% core PCE deflator are within view. S om e w h a t q u ick e
r
tightening may be forthcoming if wage growth is
evident and
sustained. We do expect some fiscal stimulus even if it is
not the $1 trillion that has been widely discussed. That said, rapid dollar appreciation, on a real trade- weighted basis, might give the Fed pause, especially if stronger world demand does not materialize.
Te Federal Reserve is unlikely to
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