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 Uncertainty is always present in elections and the Fed has hiked
rates during past campaign seasons. (Graphic: http://tmsnrt.rs/1rD6A1u)
But the possibility of the firebrand New York real estate mogul
occupying the White House presents a step up in risk because of the
unconventional policies he has proposed and a lack of detail on how
they will be achieved, economists say.
Promising to "make America great again", Trump has raised fears of a
trade war by saying he would slap steep tariffs on Chinese and
Mexican imports. He has also vowed to deport all 11 million
undocumented migrants in the United States, and suggested, though
later retracted, a partial default on U.S. debt.
Fed officials say they avoid discussion of domestic politics at
rate-setting meetings. Transcripts from previous election-year
policy discussions show that political uncertainty is a factor in
their thinking, though there no clear pattern of a loosening or
tightening bias in the run-up to elections.
In recent comments, some Fed officials have acknowledged that
campaign rhetoric could spill over into the economy.
"If consumers, because of political rhetoric, are slowing their
spending or just pausing a little bit, or capex is slowing
down...that I've got to take into account," Dallas Fed President
Robert Kaplan told Reuters last Thursday.
Asked his view of Trump's policy proposals, he said, “If I have one,
you’ll never know what that is. I will never allow that to seep into
my work.”
Atlanta Fed President Dennis Lockhart said that it was fair to say
the election "could be a factor in this year's economy."
The Fed kept rates on hold at 0.25-0.5 percent last month and
signaled it was in no rush to raise them again soon, citing slowing
economic activity despite an improved labor market. Fed policymakers
in March forecast two rate hikes this year after raising them last
December for the first time in nearly a decade.
FED KEEPS EYE ON UNCERTAINTY
Fed Chair Janet Yellen and other Fed policymakers have often cited
uncertainty over the economic, financial and policy outlook as a
factor in their interest-rate decisions. The VIX measure of
stock-market volatility is one approach to measuring uncertainty;
querying influential business owners is another. The exact mix of
measures the Fed uses is not known.
Stanford University professor Nick Bloom's economic policy
uncertainty index, which he presented to Yellen and economists at
recently as April last year, is another approach that the Fed
considers.
The index analyzes newspaper coverage of policy-related economic
uncertainty and divergence between economic forecasters' predictions
on the U.S. outlook among other factors.
"When uncertainty is high, firms put on pause hiring and investment
decisions," Bloom said in an interview. "If Trump looks like a
serious contender and is still making 'Mexican Wall' and 'Trade
Rape' comments we will have the mother of all policy uncertainty
spikes running up to the election."
Trump has said he would build a wall on the Mexico-U.S. border and
accused China of "raping" the U.S. with unfair trade policies.
A rise in the index, Bloom said, would foreshadow declines in
production, investment, and employment.
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Policymakers pay close attention to financial market volatility as
well as economic data. The Fed delayed an expected hike last
September after China's sharp economic slowdown caused stock market
drops and a tightening in financial conditions.
A strong Trump candidacy could similarly upset markets, economists
say. A Reuters/Ipsos poll released on Wednesday showed Trump running
nearly even with Democrat Hillary Clinton among likely U.S. voters,
a dramatic turnaround since he became his party's presumptive
nominee.
Traders see a 36.5 percent chance of a Republican taking the
presidency, according to futures prices on the Iowa Electronic
Market.
"If Trump gains in the polls and the market reacts poorly, that
(market turmoil) would be a good argument for the Fed to stay on
hold," said Cornerstone Macro economist Roberto Perli, a former Fed
board staffer.
China and Mexico are the second and third largest trading partners
of the United States, respectively.
"The trade stuff is anti-growth and harmful to the U.S. outlook,"
said Douglas Holtz-Eakin, president of conservative think tank the
American Action Forum and a former director of the Congressional
Budget Office.
"He's an utterly unpredictable political element at this point,"
added Holtz-Eakin, who was also chief economic policy adviser to
Senator John McCain's 2008 presidential campaign.
Trump, who says his policies will boost U.S. jobs and business
interests, has said he likes low rates, but has also said he would
replace Yellen when her term expires in 2018 if he wins the
presidency.
So far there's little indication Bloom's uncertainty index is about
to spike. It fell to a reading of 98.39 in April, just above where
it was in November ahead of the Fed's well-telegraphed rate hike.
Other readings of uncertainty, like the VIX, look similarly benign.
Voters go to the polls on Nov. 8.
Historically, Bloom's index jumps just ahead of tight presidential
ballots, as well as during times of other policy uncertainty, such
as the U.S. debt ceiling debate in 2011. A surge of 90 points in the
index could presage a one percent decline in production and declines
in employment and investment of about a half a percent each, based
on Bloom's models.
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