Goldman Sachs economists expect Donald Trump's economic agenda to lift inflation and interest rates.
They expect to see a more aggressive Fed. They also initially expect higher growth thanks to a Trump plan to spend on infrastructure — bumping their forecast for U.S. GDP growth in the second half of 2017 by a quarter point.
But they also described the effect of Trump's economic plans as "ambiguous." While they see a bump in 2017's growth rate, they see the longer-term impact of higher tariffs, reduced immigration and tighter Fed policy weighing on growth as a stimulus boost fades.
"Markets have traded the Trump victory primarily as a sizable positive growth shock, a small higher inflation shock and a small adverse policy shock (which probably mainly reflects concerns about protectionism)," the economists said in a report. They see a steady rise in inflation to 2.2 percent, as measured by core PCE (personal consumption expenditure), by 2019. It currently stands at about 1.7 percent.
The economists also raised the odds of a December rate hike to 85 percent from 60 percent and said the election of Trump reinforces their view that the Fed will raise rates three times next year.
The Fed has forecast two rate hikes for next year, but the Goldman economists said Trump's proposals should "reinforce the move in inflation that is already underway." That and the fact that the current thinking on the equilibrium rate is too low, meaning the Fed could raise the funds rate "substantially" more than implied by the markets.