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Trumpgate

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  • We consider three different political routes that could be taken in the US. On the route that seems most likely at present, the Republicans will continue to defend their President. However, if voter support for Trump falls to such an extent that the Republicans in Congress fear for their re-election, they may opt for an alternative route by starting impeachment proceedings. This will lead to the removal of President Trump if and only if impeachment in the House of Representatives is followed by conviction in the Senate. A third, but even less likely, route for Republican defection is the invocation of the 25th Amendment by the Vice President and the majority of the Cabinet, which could be taken in case of exceptional circumstances. If confirmed by Congress, this would lead to the irreversible removal of President Trump from office.
  • In the Republican Defense scenario we will continue to see slow progress on fiscal policy which might lead to a modest boost to GDP growth in 2018 or later, but nowhere near what financial markets had priced in shortly after the elections. Nevertheless, markets are likely to find support in the ongoing economic recovery. On balance, we expect 2-3% GDP growth in the coming years in this scenario with the Fed hiking 2-3 times per year.
  • However, if Republican Defection leads to impeachment proceedings or the invocation of the 25th Amendment we should not expect much fiscal stimulus. At best, if President Trump survives, we will see very slow progress and a very modest boost to GDP growth toward the end of his first term. However, confidence among consumers, businesses, and investors is likely to remain muted as the impeachment proceedings or the invocation of the 25th Amendment may seed doubts about the direction the country is going. Financial markets are likely to muddle through. We could see GDP growth slow down to 1-2% and the Fed may slow down to 1-2 hikes per year.
  • In contrast, if the situation deteriorates to a removal of President Trump from office, fiscal policy would come to standstill until his removal, confidence will plunge and we could see a ‘Trump slump’ in markets. We could see GDP growth slow down to 0-1% and the Fed temporarily pausing its hiking cycle. However, once Vice President Pence takes over we could see a ‘Pence rally’ in the stock markets, a return of confidence among consumers and businesses and the prospect of a modest fiscal stimulus, although it will still take considerable time as the divisions within the Republican Party will not disappear with the disappearance of Trump. This could bring the economy back to 2-3% growth and induce the Fed to resume its hiking cycle at a pace of 2-3 hikes per year. The length of the growth slowdown and Trump slump would only be a matter of months in case of the 25th Amendment, but in case of impeachment & conviction it could very well last a year.

Introduction

The euphoria that swept the financial markets after Election Day has faded. Progress on President Trump’s legislative agenda has been slow and an increasing amount of time and energy in the White House and on Capitol Hill is spent on ‘Trumpgate’: the possible collusion of the Trump campaign with the Russians as they interfered in the 2016 US Presidential election and President Trump’s possible interference in the Russia investigations. These developments are threatening further progress on the much-vaunted fiscal stimulus that was expected from the Trump administration and that had boosted the confidence of investors, consumers and businesses. The story of the Trump campaign and the Russians had been out there for months, but after President Trump fired FBI Director Comey (May 9), developments accelerated and comparisons to Watergate became more frequent. Where is this going to end? In this special we sketch the different political routes that could be taken, the scenarios that could unfold along these routes, and the possible impact on Trump’s legislative agenda, the US economy, financial markets, and the Fed’s monetary policy.

Impeachment and conviction

People often talk about impeachment as if it were identical to removing the President from office. However, this is not the case. In order to remove a President from office, the House of Representatives first has to impeach him, and then the Senate has to convict him. Note that President Clinton was impeached by the House in 1998[1], but he was subsequently acquitted by the Senate, so he was not removed from office. The only other President who was impeached by the House was Andrew Johnson in 1868, but he was also acquitted by the Senate[2]. Formally, no US President has ever been removed by impeachment and conviction. When the Republican leadership informed Richard Nixon that impeachment and conviction were inevitable he resigned prematurely and it never came to a vote.

Table 1: Impeachment and conviction
Table 1: Impeachment and convictionSource: Rabobank

Due to the two stage procedure of impeachment and conviction it is not that easy to remove a President from office. What’s more, while for impeachment in the House of Representatives only a simple majority of more than 1/2 is needed, conviction in the Senate requires a 2/3 majority. At present, the Republicans have a 241-193 majority in the House (1 vacancy) and a 52-48 majority in the Senate (2 independents caucus with the Democrats). Assuming that all the Democrats vote for impeachment and conviction, it would take 25 Republican defectors in the House and 19 Republican defectors in the Senate to remove the President from office. This equals about 10% of the House Republicans, but almost 37% of the Republican Senators. So even if impeachment were feasible, the hurdle for conviction would be much higher.

An additional complication is that not everybody votes along party lines. President Clinton was impeached by a House of Representatives in which the Republicans had a 228-206 majority. However, while the vote was 228-206 on the perjury charge, it was only 221-212 on the obstruction of justice charge. In fact, 5 Republicans voted against the perjury charge and 12 Republicans voted against the obstruction of justice charge (5 Democrats voted in favour of both charges). Two other charges - another perjury charge and ‘abuse of power’- failed. The impeachment in the House was followed by a trial in the Senate. The Republicans had a 55-45 majority in the Senate, but 5 Republican Senators voted ‘not guilty’ on both charges, while 5 other Republicans voted ‘not guilty’ on the perjury charge. All Democratic Senators supported their President. Hence President Clinton was acquitted on both charges. In fact, the vote got nowhere near the 2/3 majority needed for conviction. So even with a majority in both the House and the Senate, the Republicans were not able to remove a Democratic President from office. This should give us some idea of how difficult it could be to get a Republican President removed by the current Republican Congress.

However, President Clinton kept the support of his fellow Democrats in Congress. In contrast, President Nixon was abandoned by many Republicans during the Watergate affair in the end. In the House of Representatives the Democrats had a 235-182 (18 vacancies) majority and in the Senate a 57-40 majority (1 Conservative, 1 Independent, 1 vacancy). In the Senate it would have taken at least 7 Republican defectors (17.5% of the Republican Senators) to convict Nixon. This underlines that it will be crucial whether the Republicans will continue to defend their President or whether they will defect.

Figure 1: Impeachment and conviction
Figure 1: Impeachment and convictionSource: Rabobank

The road to impeachment and conviction

How far are we currently from an impeachment procedure? In case of Clinton and Nixon evidence was gathered by Congress and appointed investigators before impeachment proceedings were formally started. There are currently five investigations into the possible Russian interference in the 2016 Presidential Election, possible collusion of the Trump campaign with the Russians, and President Trump’s possible interference in the Russia investigations.

The first investigation is carried out by the Federal Bureau of Investigation (FBI). In response to Trump’s firing of FBI Director Comey, a Special Counsel was appointed (former FBI Director Robert Mueller) to supervise the Bureau’s efforts relating to Russia and Trump. These are not only targeted at possible collusion between Trump or his entourage with the Russians, but also at violations of tax law and lobbying restrictions. Mueller may also investigate President Trump’s dismissal of FBI Director Comey. In contrast to the four other investigations – that are run by Congress – the FBI is looking into possible criminal violations.

The second investigation is the one that was on television recently. The Senate Intelligence Committee (led by Republican Senator Richard Burr) is carrying out an investigation into the possible Russian interference in the 2016 Presidential Election and possible collusion of the Trump campaign with the Russians. They also questioned James Comey about President Trump’s possible interference in the Russia investigations by the FBI. The Senate’s investigation will lead to a public report.

The third effort is undertaken by the House Intelligence Committee (led by Republican Mike Conaway) which is also aimed at Russian interference in the elections and collusion by the Trump campaign. The House investigation will also lead to a public report. However, this Committee has been plagued by partisan infighting for several months.

The fourth investigation is conducted by the Senate Judiciary Committee (led by Republican Chuck Grassley) and focuses on Russian interference and President Trump’s firing of FBI Director Comey. They have also asked Mr Comey to appear before the Committee, although he has not committted. This Committee has jurisdiction over federal law enforcement.

The fifth investigation is carried out by the House Oversight and Government Reform Committee (led by Republican Jason Chaffetz for now), and is looking into the firing of National Security Adviser Michael Flynn and FBI Director James Comey, as well as possible conflicts of interest between Trump’s business empire and presidency. This Committee has jurisdiction over waste, fraud and abuse within the federal government.

How is the evidence that is being gathered by Congress and the Special Counsel going to lead to impeachment and conviction? According to the US Constitution the President, Vice-President and all civil officers of the United States may be impeached and removed only for ‘treason, bribery, or other high crimes and misdemeanors’. However, since Congress may decide what a ‘high crime and misdemeanor’ is, in practice ‘an impeachable offense is whatever a majority of the House of Representatives considers it to be at a given moment in history’ as House Minority Leader Gerald Ford said in 1970. (Ironically, Ford became President after Nixon’s resignation). For example, President Clinton was impeached on grounds of ‘perjury’ and ‘obstruction of justice’, while the House failed to impeach him on ‘abuse of power’. During his testimony to the Senate Intelligence Committee Comey did not give an answer to the question whether President Trump was guilty of ‘obstruction of justice’, but rather said that this was a question for Special Counsel Robert Mueller. However, he did say that he interpreted President Trump’s words as a ‘direction’. 

Resignation

Besides being removed from office by the Congress, a US President can also decide to step down ‘voluntarily’. In fact, this is what Nixon did when it became clear that impeachment and conviction were inevitable. However, the difference between Watergate and Trumpgate is that Nixon was dealing with Democratic majorities in the House of Representatives and the Senate, while Trump sees his fellow Republicans in control of Congress. So while Nixon stepped down to avoid a humiliating impeachment and conviction, Trump could survive an impeachment process in the House of Representatives or at least a trial in the Senate. Nevertheless, in the end Nixon was abandoned by his own party. So if removal from office would become inevitable, President Trump might decide to resign as well.

The 25th Amendment

In theory, there is an alternative legal route to remove the President from office. Since 1967 when the 25th Amendment to the United States Constitution was adopted, if the President is removed from office, resigns or dies, his Vice President automatically becomes the next President of the United States. In 1974 when Richard Nixon stepped down, he was succeeded by Gerald Ford. If Trump is removed from office or if he resigns, the next President would be Mike Pence. This amendment to the Constitution was made because the latter is unclear about who succeeds the President if he or she is removed from office, resigns, dies, or is otherwise unable to discharge the powers of the presidency. While most of these reasons for succession are clearcut, the last provides an interesting twist. What are the criteria for being unable to discharge the powers of the presidency? And who decides when to invoke the 25th Amendment in this case?

Section 4 of the 25th Amendment states that the President could be removed from office by his own Vice President with the support of the majority of the President’s own cabinet. If they send a written declaration that the President is unable to discharge the powers and duties of his office to the President pro tempore of the Senate (Orrin Hatch) and the Speaker of the House of Representatives (Paul Ryan) the Vice President (Mike Pence) shall immediately assume the powers and duties of the office as Acting President.

If the President (Donald Trump) then sends a written declaration that no inability exists to the President pro tempore of the Senate and the Speaker of the House of Representatives, he shall resume the powers and duties of his office unless the Vice President and a majority of the Cabinet transmit within 4 days to the President pro tempore of the Senate and the Speaker of the House of Representatives their written declaration that the President is unable to discharge the powers and duties of his office.

Finally, Congress shall decide the issue, assembling within 48 hours for that purpose if not in session. If the Congress, within 21 days after receipt of the latter written declaration, or, if Congress is not in session, within 21 days after Congress is required to assemble, determines by two-thirds vote of both Houses that the President is unable to discharge the powers and duties of his office, the Vice President remains Acting President; otherwise, the President shall resume the powers and duties of his office.

Note that invoking the 25th Amendment would work much faster than impeachment and conviction proceedings: it could be done within 25 days. However, it would require not only 2/3 of the Senate, but also 2/3 of the House of Representatives. What’s more, Section 4 has never been invoked. However, it was briefly considered during the Reagan presidency in 1987 when there were doubts about his abilities to discharge the powers of the presidency, because he appeared ‘inattentive’, ‘inept’, and ‘lazy’. What’s more, it has been argued that Section 4 should have been invoked after the assassination attempt at President Reagan in 1981. While at present it appears unlikely that President Trump will lose the support of his own Vice President and Cabinet before he loses the support of Congress, if time becomes an issue we cannot rule out that Section 4 of the 25th Amendment will be invoked for the first time, especially if impeachment proceedings have not yet started.

Table 2: Two routes for removal of the President
Table 2: Two routes for removal of the PresidentNote: The President's Cabinet, excluding the Vice President, consists of 15 people. A majority would require 8 votes in favour of removal from office. Source: Rabobank

What’s more, if the Vice President and the majority of the Cabinet were to invoke Section 4 of the 25th Amendment that could in itself raise the number of Senators and Representatives willing to remove the President from office because of the signal it would provide about the President’s abilities from his inner circle. In fact, the Vice President may decide to consult with the Republican leadership in Congress beforehand.

While Section 4 may not have been written for the current circumstances, the way it is formulated does offer the possibility to use it nevertheless. Note that Section 4 of the 25th Amendment is similar to the ‘high crimes and misdemeanors’ in case of impeachment: it is vague and allows for some discretion to deal with unforeseen circumstances.

Figure 2: The 25th Amendment
Figure 2: The 25th AmendmentSource: Rabobank

Republican Defense or Defection?

While impeachment has the appearance of a judicial process, it is in fact political. This means impeachment is unlikely as long as the Republican majorities in the House of Representatives and the Senate are willing to support their President. The same can be said about the invocation of the 25th Amendment. A crucial event that could determine the willingness of the Republicans to do so is the mid-term election of November 2018, when all seats in the House of Representatives and 1/3 of the seats in the Senate are at stake. A Republican Congressman has no incentive to support the President if it will cost him his re-election. If support for Trump among the Republican voters is waning, this will increase the probability of impeachment and conviction. Trump’s favourable rating peaked in December 2016 but has been on the decline in 2017. In the end we could even see the erosion of support among Trump voters.

Figure 3: Trump’s Favorability Rating
Figure 3: Trump’s Favorability RatingSource: Macrobond

An important consideration for the Republicans is that if they remove their own President from office, they will not have to hand over the White House to the Democrats: in fact the Vice President will take over. So once President Trump is removed, Vice President Pence will become the next President of the United States[3]. He has described himself as ‘a Christian, a conservative and a Republican, in that order.’ He served in the House of Representatives in 2001 through 2013, and subsequently became the Governor of Indiana from 2013 through 2017. So Vice President Pence has a much longer track record within the Republican Party than President Trump and Pence’s views are broadly in line with the conservative wing of the party.

In terms of the legislative agenda we could see a new chance of progress if we move from a constitutional crisis to a new President as Washington DC could refocus on making policy. Therefore the incentives for the Republicans to defect depend both on their re-election chances in 2018, and the increased probability of getting things done once they remove the President from office if progress on the legislative agenda has come to a standstill.

Trumpgate timeline

Before we start describing the possible routes that Trumpgate could take and the scenarios that could unfold along these routes we first want to establish some facts about the time that different routes could take. How much time could impeachment and conviction take for example? President Clinton’s impeachment proceedings lasted from January 3, 1998, until December 19, 1998. The Senate trial took place from January 7, 1999, until February 12, 1999. So impeachment of Clinton by the House took almost 12 months, his trial in the Senate ended two months later.

Bill Clinton was impeached because of perjury and obstruction of justice in relation to his extramarital affairs. However, Donald Trump’s story is much more similar to that of Richard Nixon. There were 10 months between the Saturday Night Massacre – when President Nixon fired the Attorney General and his Deputy before the Solicitor General was willing to fire Special Prosecutor Cox – and Nixon’s resignation, at the start of impeachment proceedings. So this gives us 14 months for impeachment and trial, and 10 months between the watershed event and the start of impeachment proceedings[4]. Now we could take the firing of FBI Director Comey as the watershed event, but actually the possible firing of Special Counsel Robert Mueller would be much more similar to the Saturday Night Massacre and could also entail the firing of one or two people at the Attorney General’s office. This event has not happened yet even though we have seen some speculation about it in the press. Note that history suggests that it could take two years between a watershed event and the removal of the President from office via the impeachment & conviction route. In contrast, for Section 4 of the 25th Amendment we have no history to guide us, but the text itself specifies that the procedure should be completed within 25 days. Even if we take into account that events leading to the invocation of the 25th Amendment will take some time, this is a much speedier process than impeachment & conviction.

Routes for Trumpgate

We now have all the ingredients to build scenarios for Trumpgate. With two legal paths to remove the President, we can distinguish between three routes that Congress (and the Cabinet) could take.

Table 3: Routes for Trumpgate
Table 3: Routes for TrumpgateSource: Rabobank

On these three routes six different scenarios could unfold. On the route that seems most likely at present, ‘Republican Defense’, the Republicans in Congress circle the wagons around their President and Trump completes his first term. A less likely route is Republican Defection through ‘Impeachment’. In this case voter support for Trump falls to such an extent that the Republicans in Congress fear for their re-election. The least likely route is Republican Defection through the ‘25th Amendment’. In this case Trump’s own Vice President and Cabinet, with the approval of Congress, decide that his removal from office is warranted, either because of irresponsible behavior or because he is hurting the re-election chances of the Republicans in Congress.

Scenarios for Trumpgate

The three routes that we have sketched give rise to 6 different scenarios. There is only one scenario possible along the Republican Defense route: President Trump stays in office. In contrast, the two Republican Defection routes can lead to several scenarios. Along the ‘Impeachment’ route three scenarios could unfold: Impeachment fails in the House of Representatives, Impeachment by the House but no Conviction in the Senate, and Impeachment by the House and Conviction by the Senate. Only the last outcome leads to the removal of the President from office. The ‘25th Amendment’ route offers 2 scenarios: resumption of office or removal from office.

Table 4: Routes & Scenarios for Trumpgate
Table 4: Routes & Scenarios for TrumpgateSource: Rabobank

Implications for Trump’s legislative agenda

Legislative progress has been slow to begin with. The promise of a major fiscal stimulus, through an increase in infrastructure spending and a decrease in tax rates, has yet to be fulfilled. The Congress managed to pass a spending bill to keep the federal government open through September 2017, but it was a compromise to avert a government shutdown and even contained a reduction in infrastructure spending. In terms of fiscal policy legislation that was about it[5]. Most notably, the Republicans have not yet been able to repeal and replace Obamacare. Although the health care bill passed the House of Representatives, barely and in overtime, it is now in the Senate and is likely to be sent back in revised form. Meanwhile, tax reform is still debated by the Republicans and we have not seen much progress on infrastructure spending. Ironically, in anticipation of tax cuts, tax receipts are falling which gets us faster to the debt ceiling, making things even more difficult. Despite Republican control of the White House, the Senate and the House of Representatives it is still difficult to get things done in Washington DC. Note that due to the lack of cohesion among the Republicans in Congress this would be the case under any Republican President. Therefore if President Trump were to be removed and replaced by current Vice President Pence we would still see only slow progress on the legislative agenda.

However, during the current Trump presidency a lot of time and energy on Capitol Hill and the White House is spent on Trumpgate instead of legislation. As we noted earlier, there are 5 investigations running at the same time, four of which are conducted by Congress. How will this affect policymaking? Fiscal policy is likely to be impacted the most by Trumpgate, as the President cannot get anything done without the Congress. In fact, laws about government spending and taxation are made there and the President can only veto a bill or sign it into law. Deregulation is an area where President Trump can still have a substantial impact through executive orders and presidential memoranda. Through these executive actions the President gives instructions to federal government agencies.

Trade policy also offers the President an arena to have impact upon. A number of statutes adopted by Congress in the last 100 years have transferred powers to the President which he can exercise by executive order, without approval from Congress. He can unilaterally decide to raise tariffs on imports from certain countries, for example in case of a current account deficit or unfair trade practices. In The Trump Trade War Game we explained that a number of statutes give him considerable powers in terms of trade policy. In that sense, we are likely to see a continuation of the pattern of his first 100 days: many executive orders, few laws. In our scenarios we assume that trade conflicts will be avoided, which would add to the complexity of the scenarios. Indeed, for now President Trump seems to use his threats on trade policy as leverage to get better trade deals. However, it is not unthinkable that he could embark upon a more confrontational course if he feels he cannot get anything accomplished on Capitol Hill.

While slow progress will continue under the Trump presidency as long as his fellow Republicans in Congress continue to defend him, progress would come to a standstill if we see Republican defections that lead to the start of impeachment proceedings or even the invocation of the 25th Amendment. If President Trump survives these attempts to remove him from office, we could still see legislation during the remainder of his first term, but progress would be very slow as his relationship with Congress would be damaged severely. However, if President Trump is removed from office and Vice President Pence takes over, we could see more progress – provided that Pence’s relationship with Congress remains more or less intact – although it would be slow nevertheless as the divisions within the Republicans in Congress were there well before Trump.

Implications for the economy

We should not forget that the economy had decent momentum heading into the November elections. In fact, while the US economy still faces considerable structural challenges, during the Obama administration we have seen one of the longest economic expansions in US history which has brought the unemployment rate back to normal levels. Slack still remains in the form of discouraged workers and involuntary part-time employment, but even with modest economic growth it is only a matter of time before this has disappeared. It can even be argued that the fiscal policy stimulus would come a bit late in the game and that current plans should put more emphasis on raising long-term productivity, which would also support real wage growth. Therefore, the economy can continue to grow at a decent pace without help from fiscal policy and without the animal spirits that were released after Election Day. Therefore, Trumpgate does not have to lead to a recession. However, the pace of economic growth will be negatively affected by Trumpgate nevertheless. While fiscal stimulus is still possible during Trumpgate, albeit disappointing in terms of timing and size, it could partially be offset by the negative confidence effects of turmoil in Washington DC on consumers, businesses and investors. This could slow down personal consumer spending, business investment, and residential investment. Provided that no major trade conflict is caused by the Trump administration, the economic implications of Trumpgate depend on the amount of fiscal stimulus (and deregulation) that is still politically feasible and the confidence effects of developments in Trumpgate. 

Implications for financial markets

Figure 4: 10y US treasury yield and break-even inflation rate
Figure 4: 10y US treasury yield and break-even inflation rateSource: Macrobond

If we look at market behavior since the November elections we can distinguish between three phases. In phase 1, the Trump rally, we saw a stock market rally and a rise in treasury yields as markets were euphoric about the possibility of large tax cuts, an infrastructure bonanza and deregulation. Higher prospects for after tax profits boosted stock prices, while higher expectations for economic growth and inflation raised longer-term interest rates. In phase 2 the Trump rally petered out as it became increasingly clear that legislative progress was slow and the Republicans managed to shoot down their own health care bill. In fact, after 100 days in office only one substantial law was passed, a spending bill for the current fiscal year, just to avoid a government shutdown. The Republicans made large concessions to the Democrats, including a continuation of funding for Planned Parenthood, while there was no money for the border wall and there was even a cut in infrastructure spending. After president Trump fired FBI Director Comey we reached phase 3, with markets actually having serious doubts about President Trump’s ability to get anything done as he has become involved in a political scandal that is reminiscent of Watergate. The Trump rally in the stock markets appears to have come to an end and in the bond markets inflation expectations got another reality check – in addition to the pricing out of Trump reflation – as inflation data have fallen back again.

Implications for the Fed

The June projections of the FOMC imply three rate hikes per year in 2017-2019. These projections are based on the assumption that PCE inflation will return to the Fed’s 2% target in 2018 and 2019 as reduced slack in the economy is expected to push up wages and prices. However, as inflation is actually moving away from the Fed’s 2% target at the moment we doubt that there will be a third rate hike in 2017. Notice that Minneapolis Fed President Neel Kashkari voted against the second hike in June and other FOMC participants have expressed doubts about a third hike if inflation readings continue to disappoint.

What’s more, Trumpgate could slow down the economy if the anticipated fiscal policy stimulus is delayed and disappoints in size, and if confidence effects slow down personal consumer spending, business investment and residential investment. This could slow down the Fed’s hiking cycle as well, not only in 2017, but also in 2018 and 2019. The hiking cycle could even be paused temporarily in case we would be heading for President Trump’s removal from office, although the Fed could resume its hiking pace once Pence takes over.

Scenarios for the economy, markets and the Fed

If we combine our observations on the impact of Trumpgate on the economy, markets and the Fed we arrive at the following scenarios.

Table 5: Scenarios for Trumpgate
Table 5: Scenarios for TrumpgateSource: Rabobank

In the Republican Defense scenario we will continue to see slow progress on fiscal policy which might lead to a modest boost to GDP growth in 2018 or later, although nowhere near what markets had priced in shortly after the elections. While the animal spirits that accompanied the Trump rally are fading from the economy, the economy had decent momentum without them. Financial markets are likely to find support in the ongoing economic recovery, despite reduced expectations of fiscal stimulus. On balance, we expect 2-3% GDP growth in the coming years in this scenario, although many other factors play a role besides Trumpgate. In this scenario the Fed may hike 2-3 times per year.

However, if Republican Defection leads to impeachment proceedings or the invocation of the 25th Amendment we should not expect much fiscal stimulus. At best, if President Trump survives, we will see very slow progress and a very modest boost to GDP growth toward the end of his first term. However, confidence among consumers, businesses, and investors is likely to remain muted as the impeachment proceedings or the invocation of the 25th Amendment may seed doubts about the direction the country is going. Financial markets are likely to muddle through. We could see GDP growth slow down to 1-2%. In this scenario the Fed may slow down to 1-2 hikes per year.

In contrast, if the situation deteriorates to a removal of President Trump from office, fiscal policy would come to standstill until his removal and confidence will plunge and we could see a ‘Trump slump’ in financial markets. We could see GDP growth slow down to 0-1%. In this scenario the Fed may decide to temporarily pause its hiking cycle. However, once Vice President Pence takes over we could see a ‘Pence rally’ in the stock markets, a return of confidence among consumers and businesses and the prospect of a modest fiscal stimulus, although it will still take considerable time as the divisions within the Republican Party will not disappear with the disappearance of Trump. This could bring the economy back to 2-3% growth. This would also induce the Fed to resume its hiking cycle at a pace of 2-3 hikes per year. The length of the growth slowdown and Trump slump is likely to be proportional to the amount of time it takes to remove the President. If the 25th Amendment is invoked we are looking at 25 days, preceded by an episode that spurs the invocation of the 25th Amendment. This could be a matter of months, perhaps slowing down GDP growth to 0-1% in one quarter. This may temporarily hold up the Fed, but would not have to affect the total number of hikes per year: the Fed could still hike 2-3 times in case of a re-acceleration of the economy. In case of impeachment & conviction we could be looking at about a year and a few months. In this scenario GDP growth could slow down to 0-1% for several quarters and the Fed may slow down to 1-2 hikes per year until President Trump is removed from office.

Conclusion

The economic scenarios that we described should be interpreted with care. The fate of the US President is only one of many variables that affect the economy. For example, during Watergate a major oil crisis broke out, while Clinton’s impeachment proceedings took place during a sustained economic expansion. However, the differences between our economic scenarios may provide some idea of the direction and the timing of the impact of Trumpgate on the economy, markets and the Fed. While at present we think that Republican Defense is the most likely scenario, the probabilities that we attach to the various scenarios could evolve over time. Recent events have taught us that what seems unthinkable today could be reality in the not too distant future. What’s more, history has shown that in the end Nixon was abandoned by his own party and Reagan’s inner circle at one time contemplated invoking the 25th Amendment.

Footnotes

[1] Clinton was impeached on perjury and obstruction of justice because of his testimony to Independent Counsel Ken Starr regarding his extramarital affair with Monica Lewinsky.

[2] Andrew Johnson was impeached because he fired the Secretary of War despite a law that had been adopted by Congress to keep him in office.

[3] According to Section 1 of the 25th Amendment.

[4] Note that the November 2018 midterm elections could affect the length of the impeachment process. If politicians feel pressured to abandon President Trump before the midterm elections, the impeachment process could accelerate. However, if there is no such urgency the Congressmen may prefer to spend their time on the campaign trail and the impeachment process could be delayed.

[5] In contrast, we have seen a flurry of executive orders aimed at deregulation.

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Author(s)
Philip Marey
Rabobank KEO

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