Trump's agenda and Federal reserve policies - BBH

In view of Marc Chandler, Global Head of Currency Strategy at BBH, Trump’s presidency is a notable break from the past and is perhaps the first illiberal US administration since the 1930s. 

Key Quotes

“It has upended many key elements of the US grand strategy, like its commitment to a multilateral rule-based trading regime and that an integrated Europe was in the US interest.  The transactional approach to America’s place in the world and the threat not to defend NATO members who do not spend the agreed 2% of GDP on defense belies the two or three generations of leaders who recognized that peace and prosperity in the US required peace and prosperity in Europe.”

“At the same time, it is important for investors to recognize that there is a range of opinions among senior officials in Trump’s administration.  There are some who do embrace the liberal global order but also want to project US power and interests more forcefully.  It is not clear which faction will carry the day on any one issue.  There are others who would prefer to return to the America First of Warren Harding in the 1920s, which replaced Wilson after the rejection of the League of Nations.  The era is often referred to as isolationist, and Trump is often accused of being an isolationist.”

“Trump rightfully rejected the label.  It looks as if Treasury Secretary Mnuchin was handcuffed by this at the G20 meeting, where the reference to resisting protectionism was dropped.  Apparently, he did not have a mandate to embrace proposals about fair trade either.”

“The US Treasury is expected to issue its semiannual review of the international economy and foreign exchange practices in April.  By the current criteria, China is unlikely to be cited as a currency manipulator, though with a new Treasury team being formed, the criteria could be modified in the future.”

“President Trump’s first priority has been to replace Obamacare.  Replacing Obamacare and cutting the associated taxes is a cornerstone to broader tax reform. Mnuchin would like a tax reform to be passed before the summer recess in August.  Tax reform requires not only a resolution of health care but also important decisions to be made on trade.”

“Lastly, there are two elements about the Federal Reserve that will shape the investment climate.  First, is Fed policy.  The May FOMC meeting is not live in the sense that there is practically speaking no chance of a hike.  Whatever gradual means it does not mean back-to-back hikes.  We suspect that at a one-in-three chance, the market is underestimating the likelihood of a June hike.  We would put the odds at a bit better than 50-50.”

“We expect the global climate to also be conducive for the Fed to move, barring an escalation of conflict in Asia or a de-stabilizing populist-nationalist victory in France.”

The second element is that there will be three vacancies on the Federal Reserve’s seven-member Board of Governors beginning in April when Governor Tarullo steps down.  President Trump’s Supreme Court nominee will likely easily be confirmed and then attention will shift to the Federal Reserve.  It is possible that one of Trump’s appointments later becomes the Chair when Yellen’s term is up next year.  Leaving aside the implications for other parts of Trump’s economic agenda, we expect the President’s nominees to be represent hard money and be aligned more with the hawkish regional presidents.”