With most pundits seeing the outcome of the US elections on 5 November as a coinflip, we look at the implications of a win by either Presidential candidate in several areas which are important to the macro environment – fiscal policy, immigration, the conduct of monetary policy and trade.

Harris’ proposals would probably offset the fiscal contraction under current law to leave fiscal policy broadly neutral, while Trump’s could be stimulatory, leaving the fiscal stance further unmoored from the economic backdrop of robust growth. Beyond the fiscal stance, Trump’s economic policies will tend to be negative for growth and put upward pressure on inflation, though the implications for the rates outlook will depend on the extent demand is hit by a pullback in business and consumer confidence.

Key Points:

• A Harris win is likely to see a great degree of policy continuity regarding trade (and, more broadly, industrial policy), immigration and Federal Reserve independence. A Trump Presidency in contrast would pursue substantially different policy in these areas, although a divided Congress would impede some of his agenda.
• Fiscal policy is set to turn contractionary under current policy due to expiring tax provisions. Harris’ policies would probably broadly offset that, leaving the deficit little changed, whereas Trump’s proposals most likely have a larger cost, and could make fiscal policy stimulatory. There, however, is a large degree of uncertainty around the cost of both platforms (as the fine print can be important).
• Even if there is a divided Congress, there is a good prospect that the projected fiscal contraction would be substantially wound back due to bipartisan support for various tax measures (principally relating to extending some expiring tax provisions).
• Fiscal policy settings have become increasingly unmoored from the economic environment and are not sustainable. A correction will be needed at some point in the future but doing so over the next four years is not on the radar of either candidate.
• The President has far more discretion on trade policy and on enforcing (existing) immigration laws.
• Trump has flagged large increases in tariffs, increased border security as well as ‘mass’ deportations, although we think the latter will be difficult in practice. While these may represent negotiating positions and could be scaled back, these policies would reduce economic growth, although there could be an offset if fiscal policy was to turn stimulatory. Inflation will likely rise, but as some of the increase would be temporary (tariffs) and, as the net impact on growth is uncertain, how the Fed would adjust interest rates is unclear and also depends on the overall economic environment at the time. The timing and sequencing, of the various policy changes will also matter.
• Trump’s desire to have a role in the conduct of monetary policy is possibly highly consequential – and risks a permanent shift higher in inflation (and interest rates). While we think the likelihood that he will be able to carve out such a role is low, even the attempt to do so could be damaging. The Fed could react to any doubts over its independence by being more hawkish than it otherwise would.

For more information, please see Thematic – Economic implications of the US election (October 2024)