Yellen, Clinton and Trump's gift to the nation: Don Pittis

Most credible polls now show thatRepublicancandidate Donald Trump will not win the U.S. presidentialelection. Nonetheless, he will have given his country somelasting gifts.

This week, as U.S. central bank chairJanet Yellen and her Federal Open Markets Committee (FOMC) try to decipher the post-election direction of the U.S. economy, Trump's legacy will likely mean more uncertainty for the Federal Reserve.

On Sunday, the Iowa Electronic Market, my favourite alternative way of taking the pulse of the presidential election standings, showed Trump's chance of winning rising toward 40 per cent. That followed new revelations from the FBI about the Clinton emails. As the University of Iowa professor of finance Tom Rietz explains, that doesn't rule out a Trump victory. But it still makes it unlikely.

Inflationary threat

In one of itsfinalpromises last week, the Trump campaign has offered $1 trillionin new spending without raising taxes, outbidding Democratic presidential candidate Hillary Clinton's offer of $250 billion over five years.

Clinton has said she would raise taxes on the wealthiest.But both post-electionspending planswould be of concern to Yellen and her advisers.

Billions of dollars in new spending, especially without raising taxes, raises the threat ofinflation.

Already in her most recent policy statement, and in the minutes released from previous FOMC meetings, Yellen has revealedthat the central bank hasbeen worried the economy is beginning to run too hot.

Controlling inflation, defined as the rate at which consumer prices andwages go up, is one of the main jobs of the modern central banker.

Steady, slow, inflation, at about two per cent a year, is considered optimum. Rates below twoper cent show that the economy is running at low efficiency, leaving workers unemployed, and road, port andfactory capacity unused.

Deplorable and revolting

But as inflation rises above two per cent, goes the theory,businessesbid up the price of workers and other production inputs, and those better-paid workers compete for a limited supplyof consumer goods, forcing prices up as well.

Since both wages and prices rise, inflation bursts into flame,leavingnobody better off.

As the designatedinflation firefighter, Yellen will have to haul out the hoses, slowing the economy by raising interest rates and makingborrowing more expensive.

By running in this election, even in defeat, Trumphas presented his nation with a trio of gifts.

The first is that he has shown without a doubt there is an enormous vein of discontent in the U.S. among people who feel they have been left behind.

Even if Clinton roundly defeats her opponent, Trump's popularity with a certain class of disaffected voters comes as a warning that things must change.

Political shift

This will be a great challenge to Clinton's government, but it will mean socialchangeis a priority,perhaps by enlisting the ideas of her former rival Bernie Sanders.

Trump's second gift could beincreased Democratic representation in Congress, if there's a rush away from the Republicans under The Donald.

Years of Republican majorities in the House and Senate have meant adeadlock preventing changes desperately needed to reinvigorate the U.S. economy.

The third gift could be the rump of the Republican Party that will remain loyal to Trump and his ideas long after he has lost the battle for the presidency.

Perhaps aided by Trump TV, the Trump rump'srevolt against the status quo will be a constant reminder to Clinton.The New York Times says some Trump supporters have warned of a revolution if Clinton wins.

All this will be a headache and a balancing act for Yellenas she serves out her four-year term as head of the central bank.

Charged with keeping the value of the U.S. dollar stable and inflation low, she may find herself in direct conflict with an activist administration that wants to use higher spending and the resulting higher inflation as a tool to readjust the economy.

'High-pressure economy'

Earlier this month, Yellen herselfmused in public about running a "high-pressure economy," one where unemployment is permitted to fall below normal levels and inflation allowed to rise.

As we'll likely hear again this week, critics of that view in the FOMCfear leaving rates unchanged in the short termwould start a dangerous acceleration in inflation that can only be quelled by sharp rises in rates later, forcing the economy intoa newrecession.

Already the global bond market is in retreat as new signs of inflation begin to show themselves. A thoughtful piece in the Financial Times last week suggests wage inflation will rise as boomers leave the workforce, causing a bidding war for the remaining workers.

In his last Monetary Policy Report, Bank of Canada governor Stephen Polozsaid political uncertainty due to the U.S. election has affected the economyand reduced investment.

A burst of growth announcedFridayas U.S. GDP rose 2.9 per cent, the mostin two years, could be another inflation signal.

AsYellendecides whether to raise rates after the election or hold off until after the new government makes its first moves,that uncertainty seems bound to continue.

And if Trump wins, it won't be Yellen'sproblem. He's promised to give herthe boot once he becomes president.

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