"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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
Coventry Building Society bids £780m for Co-operative Bank - what could it mean for customers?Coventry Building Society has put in an offer of £780 million to buy Co-operative Bank. When will the potential deal happen and what could it mean for customers?
-
Review: Three magnificent Beachcomber resorts in MauritiusMoneyWeek Travel Ruth Emery explores the Indian Ocean island from Beachcomber resorts Shandrani, Trou aux Biches and Paradis
