New York – Move over, Janet Yellen. The Federal Reserve chief has a challenger for the title of speaker most scrutinized by Wall Street, and it’s Donald Trump.
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All new U.S. President-elects are closely monitored by the financial community for clues about what their policies mean for markets. But Trump’s speaking style, often using enthymemes or incomplete sentences that leave room for interpretation, along with vague or contradictory campaign promises make him all the more challenging to decipher.
“His statements are crazy. He says peculiar things, like building the wall and getting Mexico to pay for it, that you know are just not going to happen,” said Allan Meltzer, a Fed historian and professor of political economy at Carnegie Mellon University, in Pittsburg.
“But his actions as opposed to his statements have been very moderate,” he said.
Exhibit A for how Trump has policy makers and investors hanging on his every word came shortly after the Republican’s conciliatory acceptance speech early Wednesday. Bonds fell and stocks gained as investors placed tentative bets that Trump’s somewhat vague platform of economic stimulus would translate into corporate profits and higher inflation.
The stakes are high. With a Republican controlled House and Senate, Trump has the opportunity to use his time in office to radically reshape the American economy.
He has pledged dramatic tax cuts, infrastructure spending and economic deregulation, and wants to repeal Obamacare. These measures he says will turbo-charge growth and help boost the wages of those who have lost out in a globalized world where “middle-class” jobs have been squeezed.
With the U.S. budget deficit at just 3.2 percent of gross domestic product, compared with 9.8 percent in 2009, and near record low interest rates, Trump has room to undertake a large-scale fiscal boost, at least in the short term.
His restrained acceptance speech hinted that infrastructure was a priority. Trump said he would “rebuild our highways, bridges, tunnels, airports, schools, hospitals (and) our infrastructure, which will become, by the way, second to none.”
On the campaign trail, Trump’s speeches were full of superlatives and unfinished thoughts that only complicated matters for traders and economic policy watchers. These enthymemes are a rhetorical device at the heart of a persuasive speaking style that has helped catapult the billionaire to the White House.
Trying to parse his words is one thing. Actually putting money to work quickly base on them brings far more risk than usual, according to Brian Shapiro, CEO of SPAG Funds, a small global macro hedge fund manager based in New York.
“I won’t react to it, but the world will,” he said. “I think people will have a heart attack if they react to every word.”
“TRUMP LITE”
Economic advisory firm Fathom Consulting dubbed the election outcome “Trump Lite”: a world in which as President-elect he would be unwilling or unable to enact some of his more extreme policies such as building a wall at the Mexico border, mass deportations of immigrants and wide-ranging protectionist measures.
“Markets are waiting to see if we are going to have the campaign Trump who spoke in rhetoric, or Trump the president who is going to be more pragmatic in his approach,” said Komal Sri-Kumar, president of Sri-Kumar Global Strategies.
Economists and fund managers, as well as the Fed’s policymakers, are looking to see which issues Trump will prioritize. So far, indications are he would pursue tax cuts, additional military spending, and revamping President Barack Obama’s Affordable Care Act, dubbed Obamacare.
Chicago Fed President Charles Evans, speaking to reporters as Americans voted on Tuesday, said he would try to figure out whether or not the new president’s fiscal policies “would be more simulative, about the same, or worse,” adding the level of market volatility would provide a clue.
Trump has no defined economic team. It is unclear whether he will follow the lead of say Peter Navarro, a professor at the University of California at Irvine, whose studies suggest a tougher trade stance against China; or whether he could cleave to Wall Street allies such as former Goldman Sachs alumnus Steven Mnuchin, who has been mooted by Trump as a potential Treasury Secretary.
“Trump’s fiscal plan as it stands is pretty vague and it doesn’t add up,” said Paul Ashworth, Toronto-based chief U.S. economist at Capital Economics. “We expect some fiscal plan that will pursue the Republican agenda, but it’s likely to be much smaller in scale than the one originally envisaged by Trump.”
While these policy questions are expected to persist even after Trump succeeds Obama in January, “the nature of the Trump cabinet appointments and the tone of their confirmation hearings will either ease or amplify the uncertainty premium in the markets,” wrote Steven Ricchiuto, U.S. chief economist at Mizuho.
Beyond Navarro and Mnuchin, all eyes will be on whether many of the conservative economists, like Columbia University business school dean Glenn Hubbard, who abandoned Trump during a divisive campaign could ultimately return as advisors.
Yet the reality-TV-host-turned-president-elect has struggled in the past to maintain the measured tone shown in his victory speech. During his campaign, for example, Trump appeared to suggest the United States could renegotiate its debts to obtain a better deal, a comment he quickly rowed back upon.
His past criticisms of Yellen as someone who should be “ashamed” of her policy actions, and comments that she was keeping interest rates low for political reasons, could roil markets if repeated during his wait to take office in January.
“He has managed to keep it under control some of the time,” Meltzer said. “Whether he will be able to do that as president will very much determine whether he is successful.”