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Finance, currency… if Donald Trump returns?

Donald Trump’s candidacy for the US presidential election in November has not yet been declared but seems inevitable. What would happen financially and monetarily if the former president returned to business in Washington? Christian de Boissieu analyzes the elements of the possible scenario

The purpose of this column is not to take sides on the upcoming U.S. presidential election. The idea is only to evoke some foreseeable monetary and financial consequences of Donald Trump’s possible return to the White House.

For U.S. foreign economic policy, there is a strong continuity between Republicans and Democrats. The persistence of the trade conflict with China, ignorance of the WTO (since Obama, the Americans have not appointed their judge to the Dispute Settlement Body), unilateral and protectionist initiatives such as the IRA, gentle insouciance with regard to the external deficit “protected” by the privileges of the dollar, cavalier attitude towards the G7 or G20 high masses…

Commercial, energy and ecological hardening

If Donald Trump were elected again at the end of the year, there would certainly be some shifts. One might expect a tightening of trade policy towards China. Above all, the United States could once again withdraw from the Paris Agreement as it did during Trump’s first term, which would be very bad news at the global level for the energy and ecological transition, its implementation and its financing.

On the domestic front, Trump II would decide on new tax cuts (too bad for the budget deficit and for inequality!) and would revive the production of fossil fuels (too bad for the climate!). His top advisers have already opened a debate about the Fed and monetary policy that deserves special attention.

While Biden and his Democratic administration have so far been respectful of the central bank’s independence, probably thanks to the restraint of Janet Yellen, former Fed Chair and current Treasury Secretary, Trump has not stopped during his term in office to attack Jerome Powell, Fed chairman since February 2018 and Republican though he may be. This has not really changed the policy of the central bank, which raised its key interest rate seven times between March 2017 and January 2019. During Trump’s term in office, the Fed spent two years tightening monetary policy (2017-2018), before easing it for two years (2019-2020).

Fiscal Balance – Monetary Policies

Since then, there has been a rebound in inflation and the inevitable tightening of monetary policy. After several months of stability in the key rate, the Fed has just hinted that three cuts could take place by the end of 2024. One can imagine that if Trump returns, and with him the tax cuts, monetary policy will have to be vigilant, perhaps even restrictive as early as 2025, to “offset” a fiscal and fiscal policy that would then be clearly expansive.

In any case, the subject occupies Trump’s team, which is still revanchist towards Powell. Steven Moore, one of his advisers, bluntly said: “We need a new Fed chairman who is pro-growth, for dollar stability and low inflation, which we haven’t had in the last three years.” As if Powell was solely responsible for the economic performance of the United States under Biden. These results are also very satisfactory for growth and employment.

While Powell’s term runs until February 2026, it is especially inelegant to seek to shorten it through political pressures incompatible with the independence of the central bank. Already, names are circulating to replace him in the event of a Republican victory. All this is premature, especially since the future composition of Congress will have to approve the nominations.

Monetary policy does not only act on and via interest rates. It also has an impact on the exchange rate. In 2017-2018, the dollar had followed the Fed’s rate hikes. In 2019, the movement remained parallel but downwards. In practice, the dollar’s exchange rate depends more intensely on the Fed’s policy than on the fiscal and fiscal policy pursued by the administration.

Deregulation measures

If Trump returns, we can also expect banking and financial deregulation measures, despite the collapse of SVB and other California regional banks in 2022-2023. To be sure, these bank failures occurred under Biden. But they stem largely from regulatory and supervisory failures inspired by the spirit and some of the measures of Trump I. If he returns, will the Republican candidate learn from it? Or will he go back to the path he opened by calling into question part of the 2010 banking reform? All bets are off.

A final illustration touches on a more restricted but highly symbolic domain. To respond to the rise of crypto-assets, central banks around the world are preparing for the arrival of their digital currency. Donald Trump has forcefully stated that, if he returns to office, he will end the Fed and Treasury’s experiments with the creation of a digital dollar. Because, in his view, a digital central bank currency risks threatening freedoms and the protection of personal data because of its intrusiveness. In such a scenario, the US authorities will have to look closely at whether the dollar, still the dominant reserve currency, can stay away from a move that would involve the euro, the yuan… The future of the international role of the greenback and, for the United States, the privileges associated with that role, especially the extraterritoriality of U.S. rules, would be at stake.

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