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Trump’s Monetary Conundrum

If the US Federal Reserve becomes too hawkish too soon, it will strengthen the US dollar, undermining Donald Trump’s stated goal of creating jobs and boosting incomes for his blue-collar base. Given his proposed fiscal expansion, Trump would be better off keeping Barack Obama's dovish appointees.

NEW YORK – When Donald Trump defeated Hillary Clinton in the United States’ presidential election, the market’s immediate negative response was to be expected. But by the next day, the market’s downward turn had already reversed itself.

US equities and bond yields rallied after Trump delivered a victory speech that seemed to signal that he was tacking to the center, which investors had originally expected him to do this summer, after he won the Republican nomination and entered the general election campaign. In his speech, Trump promised to be a president for all Americans, praised Clinton for her past public service, and vowed to pursue massive fiscal-stimulus policies centered on infrastructure spending and tax cuts for corporations and the wealthy.

Markets will give Trump the benefit of the doubt, for now; but investors are now watching whom he appoints to his administration, what shape his fiscal policies actually take, and what course he charts for monetary policy.