Ben Bernanke: markets should curb their enthusiasm

Markets have got ahead of themselves over Donald Trump's election victory, reckons formed Fed chief Ben Bernanke.

"Markets have responded strongly to Donald Trump's election victory, pushing up equities, longer-term interest rates, and the dollar," notes former Federal Reserve chairman Ben Bernanke. What's driving this reaction? Mainly "expectations of a much more expansionary fiscal policy under the new administration higher spending, lower taxes, and larger deficits". A similar thing happened early in Ronald Reagan's presidency, "which was dominated by tax cuts, increased military spending, higher deficits, and rate increases by the Federal Reserve".

However, markets shouldn't get overexcited, says Bernanke. "Fiscal changes can be both complex and contentious... no one knows at this point how long Congress will take to pass legislation." It's true that "significant tax cuts do seem likely this year", yet the "range of possible outcomes is wide". The cuts that do take place are likely to benefit high-income households who "may save much of any tax cut they receive". In any case, "the need for demand-side stimulus... is surely much less than it was three or four years ago".

The market also seems to be ignoring Trump's less welcome policy changes. In particular, "the possibility of new trade barriers, or even trade wars concerns some". Meanwhile, "the changes in asset prices themselves may partially offset the effects of the eventual fiscal programme on economic growth". For example, the rise "in longer-term interest rates... may reduce investment spending, and the stronger dollar could prove a headwind for exports". In all, growth may only rise by 0.1% this year.

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Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

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