The new administration in Washington DC has been received with mixed reactions by financial markets. During the very first days of the Trump administration, the Dow Jones industrial average surpassed the 20.000 points benchmark for the first time in history due to optimism surrounding plans of pro-business and pro-growth policies. However, the peak of the Dow Jones was short lived and some of the policies of the new administration have caused considerable controversy. Even though optimism still dominates financial and economic markets regarding the prospective policies of the Trump administration, the reality of dissident voices within the Republican Party, a staunch Democrat opposition, and unfavorable approval ratings prelude an uphill battle for the legislative agenda of the coming years. This article explores the status of the economy as well as financial policy in the United States.
Macroeconomic Outlook for the United States in 2017
During its December meeting, and taking into considerations the economic dynamics provoked by the election of President Trump, the Federal Open Market Committee (FOMC) decided to raise its target range for the national interest rate to 0.5% – 0.75%, its highest level since the onset of the 2008 financial crisis. Having just completed its first formal meeting under the Trump administration, the FOMC decided, on February 1, to maintain the target range for the national interest rate between 0.5% and 0.75%.
The macroeconomic outlook published this week by the US Federal Reserve presents continuity in regards to jobs gains and creation, which contributes to an ever decreasing unemployment rate. This trend is expected to continue as major companies within the manufacturing industry have announced new investments in the US. However, the medium and long-term future of the national manufacturing sector is tied to the implementation of a comprehensive trade policy that does not hinder the competitiveness of US goods and does not close existing international markets, but rather opens up new ones. Similarly, the Federal Reserve observed that inflation has increased somewhat over the last several weeks, which is mainly due to an increase in prices within the energy sector (i.e. fossil fuels). Nevertheless, in spite of the increase, average inflation in the US is still below the 2.0% long-term target established by the Federal Reserve.
While the Federal Reserve stated that household spending is increasing slightly and market sentiment remained optimistic, small and medium-sized business spending remains conservative and minimal. If the policies implemented by the Trump administration manage to restart the US economy and lower unemployment, the FOMC will eventually increase its target interest rate range to a level that is attractive to savers. However, for the time being, investment instruments such as stocks will continue to be the preference for those individuals interested in growing their savings.
Finally, it could take some time before the target inflation rate of 2.0% set by the Federal Reserve is reached. In fact, the last several years have demonstrated that inflation has a stronger correlation to production costs than to labor market conditions. Furthermore, schemes aimed at increasing international commodity prices, such as the OPEC output reduction Vienna Agreement for 2017, have not managed to increase inflation as much as expected.