Trumpgate: scenarios and consequences

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? 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.

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, 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. 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. 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 and a 52-48 majority in the Senate.

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In theory, there is an alternative legal route to remove the President from office. 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 Senate and the House of Representatives 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 Senate and the House of Representatives, he shall resume the powers and duties of his office unless the Vice President and a majority of the Cabinet resend their written declaration that the President is unable to discharge the powers and duties of his office within 4 days.
Finally, Congress shall decide the issue. 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.

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If the Republicans continue to defend their President we will continue to see slow progress on fiscal policy. Nevertheless, markets are likely to find support in the ongoing economic recovery. In this scenario we expect 2-3% GDP growth with the Fed hiking 2-3 times per year. However, in case of 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 on fiscal policy. Confidence among consumers, businesses, and investors is likely to remain muted. We could see GDP growth slow down to 1-2% and the Fed may slow down to 1-2 hikes per year.

If the situation deteriorates to a removal of President Trump from office, fiscal policy would come to standstill, 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 pausing its hiking cycle. However, once Vice President Pence takes over we could see a ‘Pence rally’ in the markets, a return of confidence among consumers and businesses and the prospect of a modest fiscal stimulus. 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.

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