Trumpwatching: Fiscal policy to hit the economy later in 2017 - Rabobank

Philip Marey, Senior US Strategist at Rabobank, notes, "The Fed’s rate trajectory has become as much Trump-dependent as it is data-dependent. Since we expect the positive impact of fiscal policy to hit the economy rather later than earlier in 2017, and mostly in 2018, while the negative impact of trade policy could hit us much sooner, we continue to see considerable downside risk to the Fed’s expectations of 3 hikes this year."

Key Quotes
"The participants of the FOMC should be glued to the TV every time President Trump is on the air to announce his executive orders of the day. The minutes of the previous FOMC meeting in December revealed how dependent the Fed’s rate outlook has become on the timing and impact of the economic policies of the Trump administration." 

"In their discussion of their economic forecasts, participants emphasized their considerable uncertainty about the timing, size, and composition of any future fiscal and other economic policy initiatives as well as about how those polices might affect the economy. Several participants pointed out that economic growth might turn out to be faster or slower than they anticipated."

"At the end of her January 19 speech on ‘The Economic Outlook and the Conduct of Monetary Policy’, Fed Chair Janet Yellen mentioned the potential for changes in fiscal policy to affect the economic outlook and the appropriate policy path, but repeated that the size, timing, composition, and effects remain uncertain." 

"At the end of next week’s meeting on January 31 and February 1 there will be no press conference, only a formal statement. At most, we may see some tweaking of the assessment of the economy. For example, business investment – most notably in the mining sector – appears to be improving and accelerated to 2.4% in Q4. In fact, the slowdown to 1.9% GDP growth in Q4, from 3.5% in Q3, is not as bad as it seems." 

"Despite the Fed’s upward shift in the dot plot in December, we are skeptical of 3 hikes in 2017. Both in December 2014 and in December 2015 the dot plot implied 4 hikes for the next year. However, both in 2015 and in 2016 the Fed delivered only one, just before the end of the year. The dot plot accompanying the most recent hike was only slightly less optimistic, implying 3 hikes in 2017. In fact, the FOMC has turned more optimistic since September 2016 when they published their previous dot plot with only 2 hikes for 2017. 

"The renewed optimism was linked to Trump’s anticipated fiscal policy initiatives, although there was considerable uncertainty in the FOMC regarding the impact of the policies. All’n all, the Fed’s rate trajectory has become as much Trump-dependent as it is data-dependent. Since we expect the positive impact of fiscal policy to hit the economy rather later than earlier in 2017, and mostly in 2018, while the negative impact of trade policy could hit us much sooner, we are skeptical of the Fed’s dot plot this year as well."

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