US Overview, February 7, 2017
With the radical departure in Fed policy and an entirely new political/economic outlook, I have some additional insights I would like to share with you.
After eight long years of zero interest rates, the announcement of a 25 basis point increase in interest rates and a projection of three additional rate hikes this year signal a radical change in Fed policy.
Furthermore, the election of Donald Trump along with the retention of the House and the Senate by the Republicans means that the new President will likely be able to implement his campaign agenda of abolishing Obamacare, implementing tax cuts, eliminating Obama’s numerous regulatory hurdles and also implementing a major infrastructure spending program.
Trump’s economic advisors are mostly supply-side economists who have a goal of 4+% GDP growth. As with all supply-siders, their belief is that growth will exceed inflation. However, Trump’s new economic policies will most likely be accompanied by rising labor and capacity constraints. Together with a rising minimum wage it is highly doubtful that inflation can be kept in check.
In short, investment strategies that have worked over the last eight years during an environment of zero interest rates most likely will not be successful for at least the next four with the expected radical changes in economic and interest rate policies.