Voters in the US went to the polls on November 8 to elect a new president and delivered one of the most shocking results in living memory. The Republican Party candidate, Donald Trump, a real estate mogul and reality TV star with no previous governing experience, defeated his Democratic Party opponent, Hillary Clinton, a former first lady, US senator, and secretary of state, who late polling indicated was on track to win the presidency and possibly benefit from a Democratic majority in the Senate.
The unexpected setback for Clinton also affected Senate races in key swing states, where a Trump coattail effect enabled vulnerable Republican incumbents to successfully defend their seats, thereby preserving the GOP’s upper-house majority. As a result, Trump will take office on January 20 with Republicans controlling 52 seats in the 100-member Senate and 241 seats in the 435-member House of Representatives.
In general, Trump ran a nationalist, protectionist, and populist campaign on a platform that was long on promises, high in controversy, and fairly short on details. Republicans have pronounced themselves ready to roll up their sleeves and get to work on enacting an agenda that has been blocked by a Democratic president, but the extent of overlap between the priorities of the Trump administration and the Republican leadership in the Congress is far from clear, and the president-elect has either walked back or stopped talking about several of his most controversial policy proposals, which has only added to the uncertainty surrounding his policy agenda.
From among Trump’s many promises in the areas of immigration, security, crime, health care, and economic policy, there are perhaps three—deregulation, trade reform, and tax cuts—where there is a high probability that the new administration will act quickly to deliver something fairly close to what candidate Trump proposed on the campaign trail.
Despite the uncertainty surrounding Trump’s broader policy agenda, his narrower economic policy program has contributed to a bounce in the markets since he declared victory. While announcing a quarter-point interest rate hike in December, Federal Reserve Board Chair Janet Yellen questioned whether fiscal expansion was a wise approach under current conditions, highlighting concerns that the combination of a massive tax cut and $1 trillion in infrastructure spending could quickly overheat the economy.
With Trump’s $1 trillion infrastructure investment proposal already meeting resistance, it is possible that the administration will focus on tax cuts for the time being, which might dampen growth expectations sufficiently to enable the Fed to proceed with tightening at a deliberate pace. But even if the infrastructure spending program is not abandoned, there is little chance that projects will get off the ground in 2017, and households are likely to initially use tax savings to pay down debt. Tax relief for businesses will help to spur investment and hiring, but assuming further monetary tightening and taking into account the negative impact of a strong dollar on export competitiveness, real GDP growth is forecast to accelerate to just 2.2% next year, far below Trump’s prediction of 3.5% or higher.