Recently it has been commented in diverse means on a next recession in the United States that invariably will have repercussions in the global economy. Given the current state of the US economy, several economic analysts predict a recession for the next two years. The confrontations between the Trump administration and the Federal Reserve are a political element that could accelerate the US economic cycle and turn it into a recession.

Many commentators – from both sides of the political spectrum – agree that the rise in interest rates is not a wise decision on the part of the Federal Reserve (Fed). There is a disparity between the fiscal stimulus package presented by the Republican Party and the monetary policy proposed by the Fed. There are arguments for and against each line of action. However, many economists argue that it is the discord between US authorities and the politicization of economic decisions that has generated mistrust among investors, not the economic plans themselves.

By ‘politicization’ we refer to the power game that prevails in the US government. The Trump administration has criticized the Fed’s decisions in order to push its own agenda. That is, it intends to influence monetary policy, so that it fits into the fiscal project presented by the Republican Party in Congress.

How does politicization influence the behavior of markets?

This power game has materialized in press releases, media debates, tweets and comments on social networks. These exabruptos have become factors of change of the economic cycle. For example, shortly after Trump expressed his regret for choosing Jerome Powell as president of the Fed and posting a tweet saying that the Fed was not doing its job well, the S & P 500 index had the strongest drop in that week. . In the face of concern, treasury secretary Steven Mnuchin went out to try to calm the investors; however, far from helping, it caused another fall in the stock market.

In contrast, on December 25, Trump said at a press conference that it was a good time to buy shares in the stock market. Thus, the S & P 500 rose 5% over the course of the next day, the largest percentage increase in the last four months.

Despite being criticized in various media for “not knowing how the economy works”, the markets seem to pay attention to Trump. Decision makers should not forget that economic indicators are the crystallization of human feeling. The fact that Mnuchin had to communicate with investors to restore their confidence and that – paradoxically – caused them greater distrust, is a sample of how economic behavior is driven by the “feeling” of how markets will move. An important element in the determination of this “feeling” is the political factor.

Obviously, economic indicators are much friendlier for decision making. They are quantitative, they are updated quickly in open sources and are fairly predictable. Political indicators, on the other hand, are qualitative, difficult to measure and difficult to connect with each other.

An example of an important political indicator, but one that is qualitative and difficult to measure, is Trump’s Twitter account: We know that Trump likes to use Twitter and we could even anticipate what he will publish. But the implications of their tweets are immeasurable until they occur, as was the case with the stock market crash after criticizing the Fed.

Given the current state of the US economy and its importance for the global economy, the Political Risks team then presents a series of political indicators that decision makers can monitor:

  • Decisions of the Fed: Under the argument that the inertia of the fiscal stimulus plan is being exhausted, the Fed will probably continue raising the interest rate.
  • Emerging economies: As a consequence of the above, emerging countries will want to protect their currency by doing the same, possibly generating inflation. In addition, it is important to monitor the levels of global indebtedness.
  • Trade tensions: The trade war with China and the reconfiguration of trade with Mexico and Canada will slow US growth and displace supply chains.
  • Geopolitics: In addition to the increase in the price of oil in recent months, tensions with Iran could lead to further increases if the diplomatic conflict continues to escalate.
  • Protectionism in Europe: Brexit and the possibility of exit from other European countries of the European Union will cause disruptions in the European market, the largest trading partner of the United States.


Does your organization need advice to face the nervousness of the markets? Send us an email to info@riesgospoliticos.com.mx and we will gladly help you.



Photo by Adeolu Eletu on Unsplash

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