Trump’s fiasco might save his performance and prevent an economic downturn

Trump's certainties: oil & taxesTrump at the oval office

Trump’s attempt to get rid of the Obamacare health scheme has turned into a complete fiasco, as stern warnings from the White House have failed to impress die-hard Republicans. A similar fate might await his plans to revamp public expenditure. Trump’s own party mates share his will to reduce corporation tax, but have expressed deep concern about incurring huge deficits. As a result, much of the presidential agenda might end up in the dustbin.

Such an outcome would be good news for Wall Street, which has been fairly spooked up to now by plans which openly interfere with enterprise freedom and the rule of law. It’s also good news for the Federal Reserve, faced with the unpalatable scenario of fast increasing inflation perspectives. As these become progressively subdued, it will have ample room to hike rates without the pressing need for cooling a warmed-up economy. The Fed will recover much of its autonomy for implementing a progressive stiffening of credit conditions, without having to fear any unwarranted development. It can even disregard short-term price outbursts. In its last meeting, it made it clear that any overrun of its medium term inflation objective would not prompt immediate action on its part. Furthermore, the expected hikes would only drive rates to a rather modest target at end-2018, compared with the market’s more sanguine bets.

Right now, real rates are falling in spite of all the rises implemented by the Fed. Neither does the interest curve show a marked steepening as re-purchases of maturing bonds weigh on long-term remuneration. As long as the Fed keeps a ballooning balance sheet, which has skyrocketed to 4.5 trillion dollars, no fundamental change will trim the current softening conditions. Monetary normalisation will have to wait for better times, and the greenback will fail to shoot up, thus providing extra room for a steady recovery.

Mr Trump’s failure to convince the Congress to rubber stamp his agenda will ultimately save his economic performance. Unless he unleashes a world trade war in the coming months, the dampening plans might prove to be a valuable asset in preventing a downturn. Let’s cross our fingers and pray for more fiascos to come.





About the Author

JP Marin Arrese
Juan Pedro Marín Arrese is a Madrid-based economic analyst and observer. He regularly publishes articles in the Spanish leading financial newspaper 'Expansión'.