US Economics Analyst:Economic Implications of the Trump Agenda

President-elect Trump’s proposals, if enacted, would have significant n implicationsfor the US economic outlook over the next few years, some positive and somenegative. The positive fiscal impulse from his tax reform and infrastructureproposals could provide a near-term boost to growth and, depending on thespecifics, could have positive longer-run supply side effects.

However, other proposals could lead to new restrictions on foreign trade andimmigration, which could have negative implications for growth, particularly overthe longer term. President-elect Trump must also make several Fedappointments over the next year, which raises the possibility of somewhat tightermonetary policy than under current Fed leadership.

We expect scaled-down versions of the tax reform and infrastructure policies tobe enacted. We do not anticipate significant changes on immigration policy, butincremental restrictions seem likely. Mr. Trump’s monetary policy views are stillunclear, but slightly more hawkish appointments appear likely at this stage. Tradepolicy is the greatest unknown, but we expect that Mr. Trump would followthrough on at least some of the trade policies he has outlined.

We use the Fed staff’s FRB/US model to simulate the potential economicimplications of these four aspects of his agenda. We also analyze scenariosinvolving just the growth-positive items (mainly fiscal), the growth-negativeaspects of his agenda (trade, immigration, and Fed policy), the combined effect ofMr. Trump’s proposals, and our own assumed policy outcomes.

Keeping in mind that our simulations are subject to considerable uncertainty, wedraw three main conclusions. First, Mr. Trump’s policies could boost growth in2017 and 2018, but are likely to weigh on growth thereafter if trade andimmigration restrictions are enacted, or if Fed policy turns more restrictive.

Second, core inflation and the funds rate are likely to be higher for the next fewyears in almost all scenarios. Third, the risks around our base case appearasymmetric: a larger fiscal package could boost growth moderately more in thenear term, but a more adverse policy mix would likely lead to a significantslowdown, higher inflation and tighter policy in subsequent years.