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Here’s How the Fed and the ECB Will React to Trump’s Victory

Federal Reserve Chair Janet Yellen Semiannual Monetary Policy Report To The Senate Banking CommitteeFederal Reserve Chair Janet Yellen Semiannual Monetary Policy Report To The Senate Banking Committee
Janet Yellen, chair of the U.S. Federal Reserve, listens during a Senate Banking Committee hearing in Washington, D.C., U.S., on Thursday, Feb. 11, 2016. Photograph by Bloomberg via Getty Images

Watch out Fed, the Donald’s coming.

Janet Yellen can at least take solace in Trump’s inability to replace her as Chair for a year and a few months, but the mere fact of Donald Trump’s proximity to power will be a shock to the world’s most powerful central bank.

First there’s politics. Donald Trump made a show of demonizing the Federal Reserve (well, most of the time at least), and he even featured Janet Yellen prominently in his last big ad before election day, portraying her as part of an international elitist conspiracy to steal from the American people. Some observers called the ad antisemitic, and this wouldn’t be the first time Donald Trump clashed with Yellen.

At the Fed’s September meeting, Yellen forcefully pushed back against Donald Trump’s claim that the bank’s decision making was being driven by its desire to help the Clinton campaign, rather than the U.S. economy. This tension has caused some observers to wonder whether the Fed Chair should or would step down once Trump takes office. But her term as Chair runs until February of 2018, and folks close to Yellen say she’ll resist pressure to give up her position.

That said, with a Republican Senate, Trump will be able to fill two FOMC seats right away, and if he picks nominees with much more hawkish views than the Chair, it could cause Yellen increasing trouble as she struggles to maintain a broad consensus on policy decisions.

In terms of how this election effects Fed policy, the markets are saying don’t expect much. Fed futures markets now predict a 76% chance that the Fed will raise interest rates. The same as before we know the result of the presidential election.

screen-shot-2016-11-09-at-1-11-55-pmSource: CME Group

As Jeremy Lawson, Chief Economist at Standard Life Investments pointed out in a in a research note Wednesday, “Once the noise dies down and it becomes clear that fiscal policy is set to become more expansionary, the Fed will likely recommence lifting its policy rate and at a faster pace than would have been the case should the Obama administration policies been maintained.”

The European Central Bank will not be insulated by the effects of Trump’s victory either. As Fortune‘s Geoff Smith pointed out on Wednesday, treasury yields have surged after Trump’s victory, with the logic that Trump’s calls for infrastructure and military spending will drive up inflation. Action in the Treasury market will likely drag European rates higher, putting ECB president Mario Draghi in a tough spot as he tried to keep rates low in an effort to stimulate the moribund European economy.

The art of monetary policy, however, is all about reacting to surprising new events. It doesn’t get much more surprising than Donald Trump’s upset victory on Tuesday, and central banks around the world will have their work cut out for them as they try insulate their economies from the aftershocks.