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The Fed is scrambled to make sense of Trump's 2016 election, according to transcripts

The Fed is scrambled to make sense of Trump's 2016 election, according to transcripts

According to transcripts of Fed meetings from 2016, Donald Trump's election threw Federal Reserve officials in a scramble to determine what it meant for the US economy, the world, and the central bank.

Trump's victory on November 8, 2016 was greeted with jokes about the unexpected outcome, with warnings of the grave fissures it had experienced in the US economy and the difficulties it might pose to the central bank.

"Let's take a look at some of the books of Revelations, when three unusual events collide, they may be a sign that the apocalypse is approaching," said St. Louis Fed President Andrew Bullard, referring to the final book in the Bible's New Testament, and placing Trump in a category with the Chicago Cubs' long-awaited World Series victory that year and folk singer Bob Dylan's Nobel Prize.

"Does the recent election usher in a regime change in terms of growth prospects for the United States?" he said in a transcript.

Fed staff sat down promptly to make best judgments on whether the Republican businessman would follow through with tax cuts and fiscal spending, tariffs on trading partners, or new immigration laws.

Some investors were surprised by the market's reaction - a decrease in stock prices - while others noted that their business contacts "used words like 'exuberance' and 'euphoria,'' because they anticipated less regulation and higher taxes, according to Jeffrey Lacker, the president of the Richmond Fed at the time.

The transcripts, which are released after a five-year hiatus, provide a window beyond the most shaky official statements of the day into how central bank policymakers grappled with a political incident they thought from the outset could impact their work and potentially the Federal Reserve as an institution in fundamental ways.

FED INDEPENDENCE

Even before his inauguration, Trump showed an unorthodox approach to the presidency.

Following a year of anxiety that the US economy was slowing, the Fed raised interest rates, and it followed up with further increases in 2017 and 2018. Trump's tax cuts and fiscal policies led to higher-than-expected growth.

Trump's trade policies slowed global growth, validating some of the concerns noted by Fed officials in the aftermath of Hillary Clinton's victory.

"If the new administration changes economic policies in several areas as radically as envisioned during the election campaign, we will, in retrospect, view today's interest rate decision as the last of an era," said then-Fed Vice President Stanley Fischer.

"There will likely... be challenges to the current operating procedures of the Federal Reserve and to its independence," Fischer said in a transcript.

After re-electioning then-Fed Governor Jerome Powell to the Fed chair position in 2018, Trump would sour on his pick, publicly castigating Powell for raising interest rates, and his administration decided to resign Powell.

Dennis Lockhart, who was the president of the Atlanta Fed at the time, turned the hand inward, and noted that Trump's victory, coupled with overwhelming support among white voters in rural areas, seemed rooted in economic divisions he felt the central bank needed to better understand.

"It seems to me that a lesson of the recent electoral cycle... is the public's differential perception of the economy across geography, the urbanrural spectrum, and cohorts defined by educational attainment," Lockhart said. Noting that staff had added briefings on unemployment gaps by race to Fed board presentations, Lockhart said "it strikes me that this reporting can go further."

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