Yellen, Clinton and Trump's gift to the nation: Don Pittis

Just days before the U.S. election, Federal Reserve Chair Janet Yellen will release her committee's economic diagnosis. Whatever she says, change seems inevitable.

Whoever takes power in U.S., the Trump voter revolt cannot be ignored, and that means change

After the great recession, Federal Reserve Chair Janet Yellen is still waiting for the great recovery that was supposed follow on its heels. (Associated Press)

Most credible polls now show that Republican candidate Donald Trump will not win the U.S. presidential election. Nonetheless, he will have given his country some lasting gifts.

This week, as U.S. central bank chair Janet Yellen and her Federal Open Markets Committee (FOMC) try to decipher the post-election direction of the U.S. economy, Trump's legacy will likely mean more uncertainty for the Federal Reserve.

On Sunday, the Iowa Electronic Market, my favourite alternative way of taking the pulse of the presidential election standings, showed Trump's chance of winning rising toward 40 per cent. That followed new revelations from the FBI about the Clinton emails. As the University of Iowa professor of finance Tom Rietz explains, that doesn't rule out a Trump victory. But it still makes it unlikely. 

Inflationary threat

In one of its final promises last week, the Trump campaign has offered $1 trillion in new spending without raising taxes, outbidding Democratic presidential candidate Hillary Clinton's offer of $250 billion over five years.

Clinton has said she would raise taxes on the wealthiest. But both post-election spending plans would be of concern to Yellen and her advisers. 

Billions of dollars in new spending, especially without raising taxes, raises the threat of inflation.
Last week the Republican campaign said Trump would spend up to $1 trillion without raising taxes, something that would almost certainly push inflation higher. (Reuters)

Already in her most recent policy statement, and in the minutes released from previous FOMC meetings, Yellen has revealed that the central bank has been worried the economy is beginning to run too hot

Controlling inflation, defined as the rate at which consumer prices and wages go up, is one of the main jobs of the modern central banker. 

Steady, slow, inflation, at about two per cent a year, is considered optimum. Rates below two per cent show that the economy is running at low efficiency, leaving workers unemployed, and road, port and factory capacity unused.

Deplorable and revolting

But as inflation rises above two per cent, goes the theory, businesses bid up the price of workers and other production inputs, and those better-paid workers compete for a limited supply of consumer goods, forcing prices up as well.

Since both wages and prices rise, inflation bursts into flame, leaving nobody better off.

As the designated inflation firefighter, Yellen will have to haul out the hoses, slowing the economy by raising interest rates and making borrowing more expensive.
Many expect the 'deplorables' who took their name from a Clinton characterization of Trump supporters will remain a political force after the election. (Reuters)

By running in this election, even in defeat, Trump has presented his nation with a trio of gifts.

The first is that he has shown without a doubt there is an enormous vein of discontent in the U.S. among people who feel they have been left behind. 

Even if Clinton roundly defeats her opponent, Trump's popularity with a certain class of disaffected voters comes as a warning that things must change.

Political shift

This will be a great challenge to Clinton's government, but it will mean social change is a priority, perhaps by enlisting the ideas of her former rival Bernie Sanders.

Trump's second gift could be increased Democratic representation in Congress, if there's a rush away from the Republicans under The Donald. 

Years of Republican majorities in the House and Senate have meant a deadlock preventing changes desperately needed to reinvigorate the U.S. economy.

The third gift could be the rump of the Republican Party that will remain loyal to Trump and his ideas long after he has lost the battle for the presidency.

Perhaps aided by Trump TV, the Trump rump's revolt against the status quo will be a constant reminder to Clinton. The New York Times says some Trump supporters have warned of a revolution if Clinton wins.
Even if she wins, Trump will continue to haunt Democratic presidential candidate Hillary Clinton forcing her to make adjustments in the economy that may be disruptive. (The Associated Press)

All this will be a headache and a balancing act for Yellen as she serves out her four-year term as head of the central bank.

Charged with keeping the value of the U.S. dollar stable and inflation low, she may find herself in direct conflict with an activist administration that wants to use higher spending and the resulting higher inflation as a tool to readjust the economy.

'High-pressure economy'

Earlier this month, Yellen herself mused in public about running a "high-pressure economy," one where unemployment is permitted to fall below normal levels and inflation allowed to rise.

As we'll likely hear again this week, critics of that view in the FOMC fear leaving rates unchanged in the short term would start a dangerous acceleration in inflation that can only be quelled by sharp rises in rates later, forcing the economy into a new recession.

Already the global bond market is in retreat as new signs of inflation begin to show themselves. A thoughtful piece in the Financial Times last week suggests wage inflation will rise as boomers leave the workforce, causing a bidding war for the remaining workers.

In his last Monetary Policy Report, Bank of Canada governor Stephen Poloz said political uncertainty due to the U.S. election has affected the economy and reduced investment.

A burst of growth announced Friday as U.S. GDP rose 2.9 per cent, the most in two years, could be another inflation signal.

As Yellen decides whether to raise rates after the election or hold off until after the new government makes its first moves, that uncertainty seems bound to continue.

And if Trump wins, it won't be Yellen's problem. He's promised to give her the boot once he becomes president.

Follow Don on Twitter @don_pittis

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Don Pittis

Business columnist

Don Pittis was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London. He is currently senior producer at CBC's business unit.