Can Trump strike the right balance on US monetary policy?

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When Republican Donald Trump defeated rival Hillary Clinton, the markets immediately reacted with a negative response.

However, what was equally as surprising as his win was the way currency and the markets swiftly rallied. After Mr Trump delivered a measured victory speech, US equities and bond yields bounced back.

In a much more measured tone to the one he had used during the election campaign, he heaped praise on Mrs Clinton for a hard-fought campaign as well as promising to be a president for all Americans, not just those who voted for him. He also promised that he would be pressing ahead with massive fiscal-stimulus policies, which will concentrate on huge infrastructure investment along with cutting tax bills for corporations and the wealthy.

Analysts now say that the markets are giving Mr Trump the benefit of the doubt, but that they will also be closely watching who he appoints to his administration and what shape his fiscal policies take in reality once he takes the keys to the White House in the New Year.

NourielRoubini, who was senior economist for international affairs in the White House during the Clinton era said: “They may be watching monetary policy most closely. During his campaign, Trump threatened the US Federal Reserve’s independence, and heaped criticism on Fed chair Janet Yellen. But Trump is a real-estate mogul, so we cannot immediately assume that he is a true monetary policy hawk, and not a closet dove. His campaign rhetoric may have been directed at the Republican party base, which is full of Fed-bashing gold bugs.”

While it is widely predicted that Mr Trump will look at replacing Ms Yellen when her term expires in 2018, she has already publically announced that she will not be leaving by choice before then, and the Republican is not thought to be willing to force the issue. He knows that if he forced her to resign, then the markets would react negatively to such uncertainty.

The US equity markets will now be hoping that Mr Trump goes ahead with his proposals to loosen fiscal policy and untie the hands of business and finance bosses, as well as cutting taxes.

However, investors will want to see protectionist policies from the new president. Only time will tell whether Mr Trump does manage to provide the right conditions for the US economy to thrive once he takes office in January.

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