How will the election shape the economic outlook? - Capital Economics
US Economics

How will the election shape the economic outlook?

US Economics Focus
Written by Andrew Hunter

A Joe Biden victory in November together with Democrats winning back control of the Senate could see a big increase in taxation and federal spending, together with a shakeup of healthcare, regulatory and trade policy. All of that could have a bearing on the performance of the stock market but, with fiscal and monetary policy to remain loose regardless of who wins, we doubt the election will have a major impact on the outlook for economic growth in 2021 and beyond.

  • A Joe Biden victory in November together with Democrats winning back control of the Senate could see a big increase in taxation and federal spending, together with a shakeup of healthcare, regulatory and trade policy. All of that could have a bearing on the performance of the stock market but, with fiscal and monetary policy to remain loose regardless of who wins, we doubt the election will have a major impact on the outlook for economic growth in 2021 and beyond.
  • Amid the pandemic and widespread protests earlier in the year, Biden is now favourite to win in November, which has also given a boost to Democrats’ chances of regaining control of the Senate. While his announcement of Kamala Harris as running mate may give him a short-lived bounce in the polls, with infection numbers falling again and protests dying down, the race looks set to narrow in the months ahead. If President Donald Trump wins re-election, that would also help Republicans hold on to the Senate, but their chances of winning back the House look increasingly slim, which would leave Congress divided.
  • We think there are five key policy areas on which Trump and Biden differ that could shape the outlook over the next four years. The biggest divide is on taxation & spending. Biden supports measures which, if enacted in full, would raise federal revenues and outlays by over $4trn, or by 10% relative to pre-pandemic levels. With those tax hikes focused on corporates and higher earners, that could be bad news for the stock market. By contrast, Trump has voiced support for another round of tax cuts. Either proposal would require full control of Congress to push through. While their plans imply a very different size of the Federal government over the coming years, that is unlikely to matter too much for the economic outlook because under either candidate fiscal policy would remain accommodative.
  • Biden’s proposed “public option” for healthcare is likely to have a modest impact on medical care consumption and inflation, but it could prove to be a stepping-stone to a more radical Medicare-For-All style program under a future Democratic President.
  • Trump would continue his deregulatory agenda, but so far there are few signs this has meaningfully lifted the supply side of the economy and, in any case, the main factor likely to hold back the economy over the coming years is weak demand. While Biden’s calls for a higher minimum wage and tougher environmental regulations are a clear negative for some service sectors and energy firms, we doubt they would have much of an economic impact, either.
  • A Biden win could dramatically shake-up trade policy, with a further broadening of the trade war that we’d expect under Trump off the table. But Biden may not remove tariffs on China immediately, and we suspect he would maintain pressure on China over issues like technology transfer and broader security concerns.
  • Finally, both candidates may end up pushing for looser monetary policy – albeit via different means. We expect Trump to continue his push to appoint doves to the Board, including replacing Fed Chair Jerome Powell as Chair when his term expires in 2022. We suspect Biden would most likely re-nominate Powell, but a Democratic controlled Senate could shape the Fed in other ways, including potentially pushing it to support social welfare priorities when setting policy.
  • The upshot is that while policy could look very different in five years’ time depending on who wins in November, the course of the economy will probably be little affected. Arguably of more importance is the makeup of Congress, with a clean sweep of the House, Senate, and the Presidency enabling either party to loosen fiscal policy more markedly.

How will the election shape the economic outlook?

While the course of the pandemic is by far the biggest risk to our forecasts over the next year or two, the November 3rd elections have the potential to leave a wide-ranging and long-lasting impact on the economic outlook: from tax and government spending, to trade, regulatory, and healthcare policy. This Focus provides a brief overview of the state of the race, followed by a head-to-head analysis of how we think both candidates would shape major areas of economic policy over the next four years. As the election gets closer, the key charts & tables from this focus will be kept updated through our dedicated US election page on our website.

Current State of Play

The chaotic handling of the pandemic together with Trump’s response to widespread protests in American cities have helped Biden open a wide early lead in the national polls. (See Chart 1.)

Chart 1: RealClearPolitics National Polling Ave. (%)

Source: RealClearPolitics

That widening in the polls has been even more pronounced in the rust belt and battleground states of Florida, North Carolina, and Arizona. (See Chart 2.) Across six of the key swing states to win in 2020, Biden now has an average 4-pt lead.

Chart 2: RCP Battleground States Polling Ave. (%)

Source: RealClearPolitics

Biden’s choice of Kamala Harris may yet give him some bump in the polls, with the choice reassuring some moderates that he is not veering too far left. But she is from California, a solid Democrat state, so her local profile and base is not going to help him carry a swing state, as VP pick Tim Kaine of Virginia seemingly did for Clinton in 2016.

It is true that Trump came back from larger polling deficits in 2016 against his rival, Hilary Clinton, but the share of undecided voters was higher that time around. Clinton also had similar favourability ratings to Trump, whereas Biden’s net favourability rating is close to 0, higher than Trump’s -20. Nonetheless, perhaps mindful of the upset in 2016, the implied odds of a Biden victory are still only 60%. (See Chart 3.) That may simply reflect the fact that, with three months to go, the recent wave of virus infections starting to come back under control and protests dying down, the race will probably become more competitive by November.

Chart 3: Election Betting Odds (%)

Source: PredictIt

What each candidate can achieve in office will depend on what happens further down the ticket. Biden’s boost in the polls has helped buoy the chances of congressional candidates too, with Democrats now favourites to retake the Senate. (See Chart 4.) That is helped by a favourable map for Democrats – Republicans are defending 23 of the 35 seats up for re-election this cycle. Even in a Biden-landslide, however, a filibuster-proof 60-seat majority looks out of reach.

That would probably restrict them to passing their agenda through the budget reconciliation process, which requires only a simple majority in the Senate, albeit subject to limits on the impact of policy on the deficit. That is the same tool Republicans used to pass the package of tax cuts in 2017, though with only a slim majority in the Senate, they were unable to repeal the Affordable Care Act via a similar route the year after. There are fears a narrow majority in the Senate would leave President Biden beholden to the votes of a few far-left progressive Democrats to pass legislation. But Biden could pivot in the other direction and seek support from centrist Republicans to try and pass his legislative agenda instead.

Chart 4: Makeup of Congress Betting Odds (%)

Source: PredictIt

It is possible that the next Senate majority leader pushes to scrap the filibuster rule for all legislation, which in effect would allow the Senate to pass legislation with a simple majority. The Democrat-led Senate pushed to scrap the rule for approving nominations in 2013 and in 2017, Republicans extended that to include Supreme Court candidates. Senior Democrats from the progressive wing of the party, notably Sen. Elizabeth Warren advocate scrapping the filibuster altogether, allowing the next (and all future) administrations with control of Congress to pass legislation far more easily.

If Trump were to win re-election, that would help lift the chances of Republicans further down the ballot, perhaps allowing them to retain control of the Senate. But it seems unlikely that Republicans will be able to win back control of the House. That would leave them reliant on bipartisan support from centrist House Democrats, effectively stalling all but essential legalisation.

We think there are five key policy areas which could potentially impact the economy and on which Biden and Trump differ markedly. Taxation and spending, healthcare, trade, regulation, and appointments to the Fed. Our views are summarised in Table 1 below. The rest of this focus looks at each policy area in turn.

Table 1: Trump & Biden’s Positions on the Key Issues



Taxes & spending

Second round of deficit-financed tax cuts, though likely smaller in size than the $1.5trn cuts over 10 years passed in 2017. That could include reduced individual income taxes, full tax write offs for business equipment investment & indexing capital gains to inflation.

$4.5trn of additional spending over 10 years, including infrastructure ($1.3trn), higher education ($750bn) and housing ($640bn). Mostly offset by raising taxes, including raising the corporate tax rate back to 28%, from 21%, reversing the 2017 tax cuts and raising capital gains taxes for high earners.


Status quo maintained. More executive action to tackle drug price inflation.

Offer a public option to all individuals, which could lead to an additional 5-10m Americans getting healthcare coverage – a more modest expansion than the original Affordable Care Act in 2010. Action to tackle drug price inflation.


Continued rollback of regulations and push back on introduction of new ones. But the impact on the supply side of the economy appears limited so far.

Would push to raise the Federal minimum wage to $15ph, though that is unlikely to cause a big rise in unemployment. Stricter environmental rules a slight negative for energy & mining sectors.

Trade policy

Continued escalation of dispute with China, with focus on non-tariff measures, including bans and sanctions. Potential broadening of trade war to include other parties, including the EU and smaller Asian economies.

Introduce stronger Buy America provisions. Would maintain pressure on China over security and economic concerns, with tariffs unlikely to be lifted immediately.

Fed appointments

Push to appoint more dovish members to the FOMC, including replacing Chair Jerome Powell when his term ends in 2022 with a more dovish or politically loyal candidate.

Would most likely reappoint Jerome Powell as Fed Chair. Congressional Democrats may push Fed to put greater emphasis on socioeconomic outcomes.

Sources: Candidate Websites, Various Media Reports, Capital Economics

Taxes & Spending

Assessing Trump’s plans is difficult because he is yet to announce any concrete proposals for what he would do during a second term. Nevertheless, ever since the Tax Cuts and Jobs Act was signed in late 2017, his administration has voiced support for a second round of tax cuts. Proposals range from further income tax cuts focused on the middle class, to making permanent some of the temporary provisions from the 2017 package – including the full expensing of business equipment investment ending in 2023 and, more significantly, the individual income tax cuts due to expire in 2026. Long-time Republican hobby horses, like eliminating the estate tax and indexing capital gains to inflation, also feature heavily in discussions.

Cutting the capital gains tax could boost the stock market by increasing post-tax returns but, along with eliminating the estate tax, it would have only a modest impact on federal tax revenues. Since the benefits would flow almost exclusively to the wealthiest Americans, we wouldn’t expect them to have much impact on economic growth. Extending the temporary provisions from the 2017 tax cuts would also have little impact on the near-term outlook, although they would avoid (or at least delay) a potentially significant fiscal contraction further down the road.

A middle-class income tax cut could be more significant. One proposal which would see the 22% rate (paid on income of roughly $40,000 to $85,000 for single filers) cut to 15% could, according to the Penn-Wharton budget model, reduce Federal revenues by $1.3trn over a 10-year period, worth about 0.6% of GDP per year. But the key question is whether the Trump administration could rally Congress behind such a plan. Trump’s repeated calls over the past four years for a big increase in infrastructure spending have failed to gather any significant support. His more recent calls for a payroll tax cut also appear to be falling on deaf ears, forcing him to try implementing a payroll tax deferral via an Executive Order.

Assuming Trump was able to sign off on another round of deficit-financed tax cuts in a second term, we would expect that to provide a modest boost to economic growth. But the experience of 2017-2018 highlights that any boost would only be temporary.

Biden’s tax plan would represent a radical contrast, with analysis by the Tax Policy Center earlier this year suggesting his proposals would increase Federal revenues by up to $4trn over the next decade. About half of that would come from increasing individual income taxes on the wealthy, including reversing the 2017 tax cuts and raising social security taxes for those earning more than $400,000 per year, taxing capital gains at the same rate as income for those earning more than $1 million, and eliminating various other deductions. The rest would come from increasing the corporate tax rate back up to 28%, from the current 21%, introducing a new minimum 15% tax on book income and doubling the minimum tax rate on overseas profits, to 21% from 10.5%.

On its own that would represent a major fiscal contraction, but that does not mean Biden would spell disaster for the economy. For a start, his tax hikes would be heavily geared towards high earners who have the lowest propensity to spend any additional income. There is little evidence that increasing the corporate tax rate would weigh on investment. Most importantly, the revenues raised from those tax hikes would be part of a larger fiscal deal that would include substantial increases in Federal spending. Overall, we would expect any package to be fiscally neutral and there’s a very good chance it would represent a near-term stimulus by backdating some of the projected tax revenue increases.

Biden has proposed a range of new spending commitments over the past year, including $2trn on climate change mitigation policies, $700bn on federal procurement and R&D, $1.3trn on infrastructure spending, $640bn on housing, $750bn on higher education and $450bn on care for the elderly and disabled. Admittedly, a lot of the spending included in his more recent “Build Back Better” plans appears to just be a re-badging of earlier proposals. Even accounting for that, however, Biden still appears to be calling for at least $4.5trn in additional federal spending over the next 10 years. Moreover, although he stopped short of embracing the “Medicare for all” proposals of Warren and Sanders, his healthcare plan could raise that total further.

So regardless of which candidate wins in November, there would be a push for further fiscal stimulus. But there would be a big contrast in terms of the size of the state, with Biden’s proposals implying that annual Federal revenues and outlays would be more than 10% above their pre-pandemic 2019 levels. The financial market implications could also be very different, with the stock market likely to benefit from further tax cuts under Trump, while a Biden win would raise the threat of a big redistribution away from corporations and high earners.

More so than any other policy area, however, the outlook for fiscal policy will depend on the makeup of Congress. Even in the event of a clean sweep for one party, the likely absence of a 60-seat majority in the Senate will limit the scope for major shifts in taxes or spending. And if the House and Senate remained divided, these fiscal proposals would be off the table entirely. That said, as the last couple of years – and particularly recent months – have shown, there would probably still be bipartisan support for continued gradual increases in spending, providing a modest support to economic growth.


Biden’s plans to add a public option for medical care on its own would have only a modest impact, but it could pave the way for a shift to a more ambitious single payer healthcare system further down the line. By contrast, we suspect a Trump administration would largely leave the existing system in place. Both candidates favour tougher action on drug prices, which could help keep a lid on medical care inflation over the coming years.

Most of Biden’s progressive primary challengers advocated some form of Medicare for all, which would replace private health insurance with a single payer system. Biden’s more moderate proposal is for a public option, which would compete for business with traditional insurance companies.

For most individuals, the public option would not be subsidised, which means it would most likely end up having only a modest impact on the healthcare system. When the public option was originally discussed back in 2009, (before it was dropped from the final Affordable Care Act) the CBO estimated it would end up covering just 6 million people. That is largely because the CBO thought premiums would be higher than for traditional plans, reflecting a less healthy pool of individuals using the public option, together with an assumption that the public plan would less aggressively push to manage costs.

Biden’s plan might have a slightly bigger impact than that, because it would aim to circumvent state restrictions on the rollout of Medicaid expansion, part of the original ACA that has been blocked by some Republican-controlled states. By providing deep subsidies for the free public option for those eligible for the expanded Medicare, the Biden campaign suggests the plan could boost enrolment by an additional 5m.

Even so, it looks likely that it will result in a more modest impact than the original ACA, which expanded healthcare coverage to an additional 22m Americans, triggering a big one-off rise in real healthcare consumption, while measures to control costs temporarily reduced healthcare inflation. (See Chart 5.)

Chart 5: Real H’care Consumption & Prices (% y/y)

Source: Refinitiv

Arguably the bigger question is whether Biden’s plan acts as a stepping-stone to a more ambitious single-payer healthcare system, which could have a more dramatic impact on healthcare consumption and inflation, as well as a huge impact on federal outlays. His Vice President pick, Kamala Harris, advocated a 10-year phased switch over to a single-payer system in her primary campaign. So this is perhaps one area where policy is likely to evolve over time.

By contrast, we suspect healthcare policy under a second Trump administration would reflect the current status quo. Republicans failed to make any major changes back in 2017, with the late Senator John McCain’s famous thumbs down on the Senate floor dooming their Obamacare repeal efforts. Unless they regain the Senate, the Trump administration would be limited to legal challenges and rule changes by Executive Order.

The most significant step so far has been the removal of the “individual mandate”, which penalised individuals who didn’t carry health insurance, intended to broaden the pool of covered persons and drive down the average cost of healthcare plans. That removal has led to a renewed rise in the number of uninsured but, as Chart 5 showed, that has yet to have a large impact on healthcare consumption, though inflation has begun to creep up again recently.

Instead Trump’s focus would be on measures to reduce drug prices, including following through on his latest Executive Order to tie Medicare drug prices to a basket of foreign competitors. With US consumers currently paying significantly more for most medications than consumers overseas, there is potential for US drug prices to decline, holding back medical care inflation. Given its outsized importance in the Fed’s preferred PCE measure, that would be one factor helping to persuade the Fed to keep interest rates lower for longer.

At the same time, however, action on drug prices would reduce the profitability of global pharmaceutical firms, which spend a disproportionate amount on R&D within the US. So there would likely be some negative impact on business investment.


Deregulation has been a key plank of Trump’s economic agenda and would probably remain so if he won a second term. As we argued in a recent Focus, however, there is little evidence that it has provided any significant boost to economic growth. (See here.) That is unlikely to change in a second term, especially since the key factor holding back the economy is likely to remain subdued demand.

As Chart 6 shows, there has been a clear drop-off in the flow of new regulations during Trump’s first term, with only 122 economically significant final rules published, compared to an average of nearly 250 in each of President Barack Obama’s two terms. But there is little evidence that this provided much of a boost to the economy’s supply side, with productivity growth failing to decisively break out of its weak post-financial crisis trend. It’s difficult to find much impact on individual sectors either. The financial sector deregulations passed by the Republican Congress in 2018 resulted in only a temporary increase in bank lending that was later reversed. Meanwhile, despite Trump’s efforts to ease the regulatory burden on the energy sector, activity continued to be driven mainly by global energy prices. We can’t rule out the possibility that deregulation may improve the economy’s productive potential over the longer term but, for now, the upshot is that we wouldn’t expect further deregulation during a Trump second term to provide a meaningful boost to the economy.

Chart 6: Economically Significant Rules Published
(by Presidential Year)

Sources: GWU Regulatory Studies Center, OIRA, CE

By the same token, a renewed tightening of regulation under Biden wouldn’t necessarily hold the economy back. Biden is proposing various laws to strengthen workers’ rights and promote union membership, but most significant are his long-standing calls to more than double the Federal minimum wage from the current $7.25/hour to $15/hour. As Chart 7 shows, that would comfortably be the biggest real-terms increase ever and would cover 35 million workers, about a quarter of total non-farm employment.

Chart 7: Federal Minimum Wage ($/hr, 2019 Prices)

Sources: Refinitiv, Department of Labor, Capital Economics

That said, we aren’t convinced that would lead to higher unemployment. (See here.) A number of states including California and New York have raised their minimum wage well above the federal rate in recent years but, at least until the pandemic struck, saw their unemployment rates fall even faster than the national average. In any case, the devastating impact of the pandemic on the hospitality sector – by far the biggest employer of minimum wage workers – suggests that, rather than being forced through in one go, such an increase would be phased in over several years.

While Biden’s regulatory plans probably wouldn’t harm the wider economy, they could pose a threat to certain sectors of the stock market. Health insurers and drug companies would potentially be in the firing line from Biden’s healthcare proposals, while energy firms could also be hit by his climate change agenda, which includes eliminating fossil fuels subsidies, banning new drilling on Federal lands and waters, and various other environmental restrictions. Meanwhile, although Biden is not calling for the breaking up of the biggest banks or tech firms, they could still come under tougher scrutiny from an emboldened Democratic Congress.


One of the starkest differences between a Biden presidency and a second Trump term would be the approach to trade policy. By no means would Biden signal a return to the globalisation of the 1990s and 2000s, and there is still a big question mark over how he would deal with China. But his emphasis would be on building a coalition of allies. In contrast a second Trump administration would see a continued escalation of tensions with China, a potential broadening of tariffs to include Europe and smaller Asian economies, while we wouldn’t rule out an attempt to pull the US out of the WTO.

We think a second Trump administration would double down on its more aggressive trade policy. It is also one policy area where Trump would have a relatively free hand to act even if control of Congress remained split.

While Trump touted the Phase One trade deal as a big success, any hopes of reaching the targets for additional purchases of US goods were disrupted by the pandemic. Trump has blamed Beijing for failing to stop the spread of the coronavirus beyond China’s borders, saying the bilateral relationship had been “severely damaged”. With the purchase agreements under the Phase One agreement nearly impossible to achieve now (goods exports to China so far in 2020 are running 5.5% below 2019 levels), we think there’s a good chance the agreement will be ripped up even before the election. (See Chart 8.)

Chart 8: Exports to China Under Phase One Deal ($bn)

Source: USTR, Census Bureau, Capital Economics

With exports to China less than 1% of GDP, however, even an extreme outcome would barely move the needle for the economy in the context of the recovery from the pandemic. Moreover, Trump’s reluctance to impose “penalty” tariffs on final consumer goods late last year is a sign that his administration is reaching the limits of how far it is willing to push tariffs. It therefore seems more likely that any future escalation would take the form of non-tariff measures – to drive a continued reorientation of supply chains away from China. Both sides are likely to marshal a wider range of tools in a prolonged fight, including financial restrictions and restrictions on corporations on national security grounds, highlighted by the latest spat over TikTok.

A switch in focus to non-tariff barriers would be potentially more bad news for US firms with significant business in China, posing some downside risk for the stock market. But with tariffs on final consumer goods seemingly off the table, the risks for the domestic economy appear small.

The other risk is that Trump targets other countries. After all, the trade war has led to a big diversion of trade, with deficits with other countries rising sharply. (See Chart 9.) Since 2017, four economies have accounted for almost the entire widening in the trade deficit – the EU, Mexico, Vietnam and, to a lesser extent, Taiwan.

If Trump were to raise hostilities with any of these partners, the disputes would look different from the current US-China trade spat. For the EU, tensions would focus on the auto sector. Trump has spoken favourably about the so-called “chicken tax” which imposed a 25% tariff on truck imports from outside of NAFTA. The Trump administration already concluded in a section 232 investigation that auto imports harmed national security but passed on implementing tariffs in response. With the bilateral deficit rising, the risks of him following through would be higher in a second term.

Chart 9: US Trade Position (12m Rolling Sum, $bn)

Source: Refinitiv

The new USMCA deal probably means that Trump will probably not turn his fire against Mexico. The more likely risk is that Trump turns on Vietnam and other small economies in Asia, many of which may come under fire for currency manipulation. These conflicts would play out differently to the US-China dispute, with their economies far smaller than the US, but also reliant on the US for security assistance. As a result, we suspect the US could extract modest concessions fairly easily. That would echo the changes that Trump pushed for to the US-Korea free trade agreement back in 2018.

Even if those disputes are resolved quickly, the prospect of more tariffs means that trade disputes could still be a modest downside risk for financial markets in 2021 and beyond.

Biden’s emphasis on closer ties with America’s allies and his previous and current support of global trade rules suggests he would pursue far less protectionist policies.

So far, Biden has said relatively little, but his “Build Back Better” plan includes a push to re-shore critical manufacturing using heavier use of the Defence Production Act and by stronger buy American clauses in federal contracts. That would reinforce a trend underway in recent years towards shorter, simpler, and more resilient supply chains. All of that could be a modest positive for US manufacturing, at the expense of slightly higher prices for consumers. He also seems to reject some of the efforts to liberalise free trade that he was part of crafting during the Obama administration, most notably saying that he would “renegotiate” parts of the Trans-Pacific Partnership trade deal.

Even so, Biden talks frequently about the need for strong global trading rules and argues that the US “better figure out how to begin writing the rules of the road”. His campaign even acknowledges that his nationalistic Buy America provisions should still adhere to global trade rules.

One of the biggest uncertainties with Biden is how and whether he would unwind Trump’s tariffs, particularly on China. We do not think he would rip up the agreement on day one (assuming Trump himself hasn’t done so before then), in large part because there is a growing anti-China sentiment among members of both political parties. (See Chart 10.)

Chart 10: Unfavourable View of China (%)

Source: Pew

Biden has been sharply critical of Trump’s Phase One trade deal, arguing that tariffs have imposed costs on American consumers in return for few concessions from Beijing. In recent interviews, Biden sidestepped questions on whether he would scrap the tariffs, instead simply saying that he would refocus US demands on commitments on structural changes to China’s policies on technology transfer and market access. It seems likely he would push for renewed negotiations, perhaps involving a broader set of allies, to pressure China into making structural changes.

We are sceptical that would be any more effective than Trump’s approach at encouraging China to change its behaviour. Under President Xi, China has increasingly emphasised a state-led model focused on fostering domestic innovation, a shift which has been reinforced by the pandemic. (See here.) And China is acting more assertively internationally. The upshot is that US-China relations are likely to remain tense, with continued pressure to reduce ties where national security is at stake, or where there are concerns over unequal market access, regardless of who is President. But Biden could at least pave the way for an easing of tariffs, though in the post-pandemic world, any boost to the real economy would be barely perceptible.

Fed Appointments

Despite initially appointing ‘mainstream’ candidates to fill the unusually large number of vacancies on the Fed Board of Governors, by late 2018 Trump was publicly attacking the Fed for raising interest rates and reportedly sought legal advice as to whether Powell could be fired. With that criticism having continued for most of the past two years, it seems pretty clear that Trump would try and push the Fed in a more dovish direction if he won a second term.

Chart 11: Remaining Terms of Fed Board of Governors

Source: Federal Reserve

Admittedly, his efforts to reshape the Fed Board so far, by filling the two remaining vacancies with political allies, have not been a success. The nominations of Stephen Moore and Herman Cain were pulled in the face of stiff opposition from Senate Republicans and the subsequent nomination of Judy Shelton still hangs in the balance. But Trump could yet succeed in nominating more credible dovish candidates, with Christopher Waller, an economist at the St Louis Fed, looking more likely to win Senate confirmation. Moreover, Trump would have a much greater opportunity to reshape the Fed when the Board term of Richard Clarida and, crucially, Jerome Powell’s term as Chair both expire in 2022. (See Chart 11.)

It’s no longer as sure a bet as it once was that Trump would seek to replace Powell – Trump recently acknowledged that the Fed Chair had “stepped up to the plate” during the pandemic and that he was “getting more and more happy with him”. Nonetheless, Trump has hardly shown himself to be one to forgive and forget and, given the exceptionally high turnover for most of his other political appointments, it would still be a surprise if Powell’s term was renewed.

Even if Trump succeeded in replacing Powell and appointing other doves to the Fed Board, that wouldn’t necessarily have much bearing on the near-term outlook given that short-term interest rates are already set to remain at near-zero for the foreseeable future. The bigger concern is the signal it would send about the Fed’s independence and credibility as an inflation-fighting central bank, particularly at a time when officials are already increasingly dismissive of the prospect of higher inflation. If bond investors started to fear a rise in inflation that would require tighter policy further down the line, that could start to put upward pressure on long-term interest rates.

Biden, on the other hand, has condemned Trump’s criticism of the Fed in recent years and supports the central bank’s independence. He did recently announce his support for a bill unveiled by Congressional Democrats, which would amend the Federal Reserve Act to force officials to explicitly monitor and take steps to combat racial inequality. But the Fed has already been discussing racial gaps in unemployment and other economic outcomes in its Monetary Policy Reports for several years now and, in any case, it isn’t clear how the Fed’s standard tools could address those problems.

This shift has clear parallels with the 1960s and 1970s, when the Fed was similarly caught up in the national mood of civil rights demonstrations and President Lyndon Johnson’s war on poverty. In September 1979, Arthur Burns, who was Chair of the Federal Reserve up until 1978, gave an infamous speech on “the anguish of central banking”. He acknowledged that the Fed “had the power to abort the inflation at its incipient state 15 years ago or at any later point, and it has the power to end it today. At any time, within that period, it could have restricted the money supply… to terminate inflation with little delay. It did not do so because the Fed was itself caught up in the philosophic and political currents were transforming American life and culture.” For Burns, the anguish of the central banker in the 1960s and 1970s was that even though they had a strong disposition to control inflation, Fed officials felt unable to do so because raising interest rates would have frustrated the will of the democratically elected Congress, which was intent on expanding welfare spending, reducing poverty and improving economic outcomes for minorities.

Admittedly, there is also a question over whether Biden would reappoint Powell as Chair in place of a Democratic alternative. On balance, however, we suspect Biden would seek to re-establish the tradition of incoming presidents re-appointing Fed Chairs chosen by their predecessors, not least because Powell has proved a highly effective leader in the recent crisis. Regardless, the big picture is that whoever wins in November, Fed policy is likely to remain exceptionally loose over the coming years.


While a Biden victory in November together with Democrats regaining control of Congress could lead to a significant increase in taxation and federal spending, as well as a shakeup of both healthcare, trade and regulatory policy could have a major bearing on the sectoral makeup of the economy, it is unlikely to determine its course. Under both candidates, we’d expect fiscal and monetary policy to remain exceptionally loose, with the recovery from the pandemic (and the potential for an effective, widespread vaccine) likely to remain the driving force of the economic outlook over the coming years.

Andrew Hunter, Senior US Economist,
Michael Pearce, Senior US Economist, +1 646 583 3163,