Sovereigns, Corporates




Analytical commentary

The course of events will be largely determined by the scale and speed of economic and budgetary reforms on Trump’s presidential agenda 

In recent years, the impact of the U.S. economic policy on the global economy and individual countries has been manifesting itself mainly through Fed interest rates. The soft monetary policy enforced following the 2007–2008 crisis had resulted in lower yields on U.S. Treasury bonds and a weaker USD, fostering growth of oil prices and giving a boost to emerging markets. Yet the expected rise of Fed rates will make assets of emerging economies less attractive, and a stronger dollar will put pressure on commodity listings.

If Donald Trump’s economic agenda gets adopted, within the next two years we can expect a more rapid increase of U.S. interest rates up to 2 percentage points. Chances are high that rates will be rising throughout 2017 and, apparently, we will see at least four increases.

The Trump effect

The number and size of 2017 FRS rate increases relate to the dramatic shift in economic policy caused by the election of Donald Trump. The fact that the republicans retained control not just of the House of Representatives, as expected, but also the Senate, was an important milestone.

Given that the Republican Party now controls both the Congress and the Presidency, something not seen since the 1920s, the greater is the likelihood that Trump’s agenda will be enacted into law. The question then becomes, how will Trump’s more conservative fellow party members deal with his call for tax cuts, more military spending, and more infrastructure spending on a grand scale? Granted the powerful and unprecedented use of social media by Trump, I believe he will be able to overcome some republican opposition, getting most of his agenda passed by Congress.

Inflationary pressure on the rise

The U.S. economy is fast approaching full capacity. Domestically generated inflation will continue to emerge. Unemployment is already near “full employment.” Wages are finally increasing. Although wage increases are clearly needed, the issue becomes how will domestic prices react (especially in the vital services sector, which is pretty immune to foreign competition) to an economy at or near full capacity?

Timing of new laws will have an impact

Much will depend on the speed, with which the Trump agenda is enacted into law. From today’s vantage point, it is possible that major changes in fiscal policy might be enacted within the first six months of his presidency. If that is the case, then a pre-emptive interest rate increase of 0.25 percent will likely be needed starting in March. The speed of rate increases will depend on the pace of implementation of the new fiscal policies.

Tax cuts

If tax cuts occur both for business and individuals within the first six months, then a rate rise specifically aimed at balancing out those tax cuts will likely occur. Assuming individual tax cuts are approved, a 0.25 percent rate rise can be expected soon after. Since business tax cuts will take a while before their full impact is felt, this implies further rate increases in 2018.

Military spending

Higher military spending will have an impact over time, causing further pressure on rates towards the end of the year, and definitely by 2018.


Higher infrastructure spending could have a notable impact on rates in 2017. Since infrastructure spending does not usually happen immediately after passage of legislation, assuming that there are already a number of projects which are ready to go, we could see infrastructure spending impacting 3Q17–4Q17. As such, I expect another two rate increases due to infrastructure spending in the second half of 2017.


Given higher military spending, higher business investment due to the business tax cuts and higher infrastructure spending, I anticipate that there will likely be at least four rate increases in 2018, although one or more may be 0.5 percent rate rises, instead of the 0.25 percent increases markets have grown accustomed to seeing.


The election of Trump implies a faster growing economy. However, since any growth will be happening in an economy already at or near full employment and at or near full capacity, a more rapidly growing economy at this point implies more inflationary pressures. In 2017, we are likely to see as many as four rate increases spread throughout the year. In 2018, rates are likely to rise by at least another 1.00 percent, with the exact timing difficult to predict so far in advance.

Vedomosti, 23.01.2017

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Maria Mukhina
Operating Director
+7 (495) 139 04 80, ext. 107
Natalia Porokhova
Senior Director, Head of Sovereign Ratings and Forecasting Group
+7 (495) 139 04 90
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