Riding the uncertainty wave
23 May 2017
Following President Trump’s decision to fire the FBI Director James Comey on May 9, there has been speculation that the circumstances surrounding the decision could eventually lead to the President’s impeachment, which in turn has weighed on market sentiment. Although it is not for us to hypothesise about where the various investigations into the alleged ties between the President’s election campaign officials and the Russian government might lead, we can offer some clarity about the impeachment process and how high the barriers are to removing a president from office.
According to the constitution, “the President…of the United States shall be removed from Office on Impeachment for, and conviction of, Treason, Bribery, or other High Crimes and Misdemeanours." Although this language is legalistic, impeachment itself is inherently political. First, an article of impeachment must be proposed and passed by a simple majority in the House of Representatives. Then, an impeachment trial must take place in the Senate, presided over by the Chief Justice of the Supreme Court. The president is only removed from office if after the trial, 67 of the 100 senators vote for removal. Presidential impeachment proceedings are exceedingly rare. Only two Presidents: (Andrew Johnson in 1868 and Bill Clinton in 1998) have been impeached by the House (Richard Nixon resigned before impeachment resolutions were voted on), with both facing hostile House majorities, but both were still acquitted in the Senate. Given that Republicans are still ascendant in both the House and Senate, impeachment remains a tail-risk scenario. To become a more serious possibility, we would need to see much stronger evidence of serious impropriety emerge, dragging the President’s popularity down, and threatening the Republican majority and legislative agenda, as well as precipitating high-profile resignations from within the administration.
More likely in our view is that the scandal simply further erodes the President’s political capital and makes it more difficult to pass legislation this year. The good news is that there now appears to be little in the way of major fiscal stimulus or tax reform factored into market pricing. For example, the US yield curve is now flatter than it was on the eve of Election Day last November (see Chart 2). We ourselves had not factored large tax cuts into our central forecasts anyway, so have not had to change our assessment of the outlook, though tax cut-led fiscal stimulus by the end of the year should not be ruled out even after the events of the past two weeks. The bad news is that if there is a period of heightened uncertainty about future economic policy that alone could weigh on growth and risk assets. Currently, the Economic Policy Uncertainty Index first put together by Baker, Bloom and Davis is currently above its long-term average, but by less than one standard deviation (see Chart 3), with most of that uncertainty related to potential changes to health care and tax rules. If that index were to rise over the coming weeks and broaden out to other policy categories, the economy could weaken. Business sentiment indicators have been elevated in recent months, despite months of above-average economic policy uncertainty, and thus we will be monitoring the next round of the ISMs and PMIs for any signs that businesses are changing their outlooks in light of recent events.
Jeremy Lawson, Chief Economist