World scrambles to calculate the cost of Trump presidency
Federal Reserve threat pegged along with short-term pain for smaller currencies
INTEREST rates may very well rise in the US next month, possibly triggering a wave of reciprocal action from emergingmarket central bankers, including South Africa’s Reserve Bank, as currencies weaken. This would heighten inflationary temperatures.
But with Donald Trump’s surprise victory in the US presidential race this week, there are question marks over whether the Federal Reserve’s gradual path of interest rate hikes will be sustained in the new year and beyond.
Since the Fed set global markets on this course at the start of 2014, emerging-market currencies have been on a weakening path, with the rand depreciating 36% over that time against the US dollar.
Any change in US monetary policy could in fact see a reprieve for battered emergingmarket currencies.
While he is a supporter of a strong dollar in principle, Trump has singled it out as a reason for the US’s lack of competitiveness in global trade against countries such as China. During his campaign, he came out in support of low interest rates and aimed public barbs at Fed chairwoman Janet Yellen.
Kevin Lings, chief economist at Stanlib, said Trump’s victory was bad news for the Fed.
While campaigning in May this year, the US president-elect said in a CNBC interview that he may not renew Yellen’s fouryear contract when it expires in 2018.
Reacting to mounting speculation this week about Yellen’s future, an economic adviser to Trump told the Wall Street Journal that the president-elect would not seek her resignation.
A US president is allowed to appoint two governors to the seven-member board of the US Federal Reserve and cannot fire the chairman because of disagreement over policy choices — only for misconduct.
President Barack Obama retained previous Fed chairman Ben Bernanke when he took office in 2008, following the pattern of his predecessors.
“Not reappointing Yellen could create concerns that the Federal Reserve is no longer independent from Washington,” Lings said.
Trump has supported a proposal enabling congressional auditors to review the Fed’s decisions on interest rates.
“This would amount to extreme political interference,” said Lings.
Holger Schmieding, chief economist at private bank Berenberg in Germany, said Trump’s call for change in leadership at the Federal Reserve may “now raise big concerns in financial markets”.
Trump could ask Yellen to step down or publicly criticise her leadership at the Fed, but she would not be required to resign, Schmieding said.
“We expect her to choose to serve out her term as chair even under adverse circumstances. The costs of doing otherwise may jeopardise the Fed’s credibility as an independent central bank.”
Despite the uncertainty around the Fed, global chief economist at Renaissance Capital Charlie Robertson said he believed US interest rates would rise, but not dramatically.
Market watchers had expected at least four rate hikes this year, but the Fed left the federal fund rate unchanged at 0.5% for the seventh time at its meeting this month despite the case for a rate hike increasing.
The labour market has strengthened and economic activity is improving, data published last week showed.
Robertson said “a rate hike in December and two in 2017 are plausible”.
Schmieding said that “as long as the post-election uncertainty does not morph into a major economic calamity” the Fed may raise rates by 25 basis points at its final meeting of the year on December 14.
If the economy continued to improve, two rate hikes of 25 basis points in 2017 and 2018 were anticipated, he said. “Gradual gains in wage inflation and a likely modest fiscal stimulus to come, support the case for a cautious scaling down of the Fed’s monetary stimulus.”
Economist Iraj Abedian said that if Trump followed through with his economic plans to boost the US economy, raising interest rates would be unavoidable.
Trump has indicated that tax cuts may become retrospective in the US. His plans to lift demand through infrastructure spending may take longer to implement. About $500-billion (R7.2-trillion) of infrastructure spending is expected.
“To the extent that he’s bent on promoting domestic fixed capital formation [investment] in the US, that’s going to accelerate the existing growth momentum in the US,” said Abedian.
“If you take that seriously and Yellen and him take it seriously then they would start raising the interest rates to prevent inflation building up.”
Such a move would result in an immediate weakening of currencies, something Abedian said markets had already priced in to an extent.
“The more substantive and structural impact will come from the fact that other interest rates will have to sooner or later follow suit,” he said.
In September this year, South Africa’s Reserve Bank suggested that it may be at the end of its tightening cycle.
The bank’s governor, Lesetja Kganyago, warned, however, that prospects for a resumption of US monetary policy tightening remained “a key risk”.
But after Trump’s victory, Kganyago indicated this week that there may not be an immediate impact on local interest rates following the weakening of the rand.
“To the extent that this is a one-off event, it has no impact on rates trajectory.
“To the extent that it feeds itself into domestic price formation and is sustained and leads to second-round effects, monetary policy has got to react to that.”
We expect her to serve out her term even under adverse circumstances To the extent that this is a one-off event, it has no impact on rates trajectory