If Donald Trump wins the White House again, the Federal Reserve's fight to control inflation is likely to confront new obstacles, which may put the American central bank back in the former Republican president's crosshairs.
Many economists believe that Trump's tariff plan, along with his plans to deport millions of undocumented workers and the possibility of higher deficits, will rekindle price pressures that are currently abating and probably force the Fed to respond with more restrictive monetary policy than is currently anticipated.
Experts estimate that Trump's proposal to levy 10% general tariffs on imports, with considerably higher rates applied to Chinese goods, would cause a one-time spike in inflation, and that the pressure would be increased further by deportations raising salaries for those who remain in the workforce.
A second Trump administration would see an inflation measure that excludes food and energy prices closely monitored by the Fed peak between 0.3 and 0.6 percentage points above what would be expected under current appropriations law and policy, according to an Oxford Economics model that examines the candidates' likely policy positions.
In contrast, a Democratic government led by Vice President Kamala Harris—the front-runner now that President Joe Biden has withdrawn from the race—could see surplus inflation of between 0.1 and 0.2 percentage points. Oxford and others believe Harris will essentially carry on Biden's economic initiatives.
The Fed, which is now moving closer to its 2% objective following aggressive rate hikes and is on the cusp of containing generation-high inflation, would suffer from resurgent inflation. The markets now predict a rate decrease in September and more after that.
According to Mark Sobel, the U.S. chairman of the Official Monetary and Financial Institutions Forum and a former Treasury Department employee under both Democratic and Republican administrations, "the Trump economic program is inherently inflationary." "Mass deportations of immigrants, much higher tariffs, and an expansionary fiscal policy: These factors combined would raise inflation and interest rates higher than they otherwise would be."
Trump's tariff increases along with a "sharp" restriction on foreign workers, according to chief economist Diane Swonk of KPMG U.S., indicate "a resurgence" in inflation and would probably require the Fed to keep rates at present levels for "much longer.""
Biden and Harris's trade strategy "remains leagues away from what Trump has been proposing regarding tariff policy," according to TD Securities chief U.S. macro analyst Oscar Munoz. As for the "surgical" trade moves that a Harris administration is expected to pursue, he stated, "we don't anticipate those policies to represent a meaningful risk for our inflation/growth forecasts."
If Trump wins, Evercore ISI analysts predict that the Fed will react to a revised outlook more slowly than the markets.
However, they noted that if Trump wins, officials could decide to postpone some of the rate cuts that are now scheduled for next year and possibly even consider raising rates in late 2025.
When questioned about how Trump's economic platform would defy analysts' predictions of greater inflation, National Press Secretary for the Trump campaign Karoline Leavitt responded, "The American people don't need economists to tell them which president put more money in their pockets."
"When President Trump is back in the White House, he will reimplement his pro-growth, pro-energy, pro-jobs agenda to bring down the cost of living and uplift all Americans."
It's unclear how the Fed would account for the consequences of a Trump win, but at least one former US central banker thinks it ought to start doing so—even while considering a rate decrease in the near future.
This month, former Boston Fed leader Eric Rosengren posted on social media site X, saying, "If a Trump victory looks likely, the Fed will need to consider whether cutting based on current data makes sense if likely fiscal actions would cause them to need to reverse policy to counter the inflationary shocks if his publicly announced policies go through." "That's just responding to a revised forecast; that's not politics."
However, Thomas Barkin, the president of the Richmond Fed, advised against it.
“I think it'd be very hard to make policy today” against expectations of future government actions, he told reporters last week.
In the meanwhile, Fed Chair Jerome Powell earlier this month declined to address the potential effects of future policy changes, such as increased tariffs, in front of Congress.
The change in inflation would be gradual, according to Jason Furman, a Harvard University economics professor and the former leader of the Council of Economic Advisers during the Obama administration. He clarified that while inflation would be greater than it otherwise would be and monetary policy would be tighter, "you're not talking about 5, 6% inflation."
Another unknown is how a Trump victory would be received by the Fed, which might reverse or even limit rate reduction. Powell was the Fed chairman Powell selected, and during Trump's term, the two had a well-known falling out. However, Trump recently assured Bloomberg that he would not attempt to remove Powell before his tenure as chair ends in 2026.
At a Friday lecture in Peru, Barry Eichengreen, a professor of economics and political science at the University of California, Berkeley, suggested that Trump would try to restructure the Fed if it disagreed with the consequences of his policy decisions.
"In May 2026, President Trump would have the easier choice of selecting a more submissive Federal Reserve Chair,” according to Eichengreen. This person would not take any action to counteract the growing inflationary pressures, which would exacerbate them.
Nevertheless, speculators might significantly raise the price of taking the Fed by storm.
"You probably at the very least would see some market response to even the attempts to weaken Fed independence," according to Cato Institute trade policy specialist Scott Lincicome, and that might lead elected officials to rethink such moves.
(Source:www.reuters.com)
Many economists believe that Trump's tariff plan, along with his plans to deport millions of undocumented workers and the possibility of higher deficits, will rekindle price pressures that are currently abating and probably force the Fed to respond with more restrictive monetary policy than is currently anticipated.
Experts estimate that Trump's proposal to levy 10% general tariffs on imports, with considerably higher rates applied to Chinese goods, would cause a one-time spike in inflation, and that the pressure would be increased further by deportations raising salaries for those who remain in the workforce.
A second Trump administration would see an inflation measure that excludes food and energy prices closely monitored by the Fed peak between 0.3 and 0.6 percentage points above what would be expected under current appropriations law and policy, according to an Oxford Economics model that examines the candidates' likely policy positions.
In contrast, a Democratic government led by Vice President Kamala Harris—the front-runner now that President Joe Biden has withdrawn from the race—could see surplus inflation of between 0.1 and 0.2 percentage points. Oxford and others believe Harris will essentially carry on Biden's economic initiatives.
The Fed, which is now moving closer to its 2% objective following aggressive rate hikes and is on the cusp of containing generation-high inflation, would suffer from resurgent inflation. The markets now predict a rate decrease in September and more after that.
According to Mark Sobel, the U.S. chairman of the Official Monetary and Financial Institutions Forum and a former Treasury Department employee under both Democratic and Republican administrations, "the Trump economic program is inherently inflationary." "Mass deportations of immigrants, much higher tariffs, and an expansionary fiscal policy: These factors combined would raise inflation and interest rates higher than they otherwise would be."
Trump's tariff increases along with a "sharp" restriction on foreign workers, according to chief economist Diane Swonk of KPMG U.S., indicate "a resurgence" in inflation and would probably require the Fed to keep rates at present levels for "much longer.""
Biden and Harris's trade strategy "remains leagues away from what Trump has been proposing regarding tariff policy," according to TD Securities chief U.S. macro analyst Oscar Munoz. As for the "surgical" trade moves that a Harris administration is expected to pursue, he stated, "we don't anticipate those policies to represent a meaningful risk for our inflation/growth forecasts."
If Trump wins, Evercore ISI analysts predict that the Fed will react to a revised outlook more slowly than the markets.
However, they noted that if Trump wins, officials could decide to postpone some of the rate cuts that are now scheduled for next year and possibly even consider raising rates in late 2025.
When questioned about how Trump's economic platform would defy analysts' predictions of greater inflation, National Press Secretary for the Trump campaign Karoline Leavitt responded, "The American people don't need economists to tell them which president put more money in their pockets."
"When President Trump is back in the White House, he will reimplement his pro-growth, pro-energy, pro-jobs agenda to bring down the cost of living and uplift all Americans."
It's unclear how the Fed would account for the consequences of a Trump win, but at least one former US central banker thinks it ought to start doing so—even while considering a rate decrease in the near future.
This month, former Boston Fed leader Eric Rosengren posted on social media site X, saying, "If a Trump victory looks likely, the Fed will need to consider whether cutting based on current data makes sense if likely fiscal actions would cause them to need to reverse policy to counter the inflationary shocks if his publicly announced policies go through." "That's just responding to a revised forecast; that's not politics."
However, Thomas Barkin, the president of the Richmond Fed, advised against it.
“I think it'd be very hard to make policy today” against expectations of future government actions, he told reporters last week.
In the meanwhile, Fed Chair Jerome Powell earlier this month declined to address the potential effects of future policy changes, such as increased tariffs, in front of Congress.
The change in inflation would be gradual, according to Jason Furman, a Harvard University economics professor and the former leader of the Council of Economic Advisers during the Obama administration. He clarified that while inflation would be greater than it otherwise would be and monetary policy would be tighter, "you're not talking about 5, 6% inflation."
Another unknown is how a Trump victory would be received by the Fed, which might reverse or even limit rate reduction. Powell was the Fed chairman Powell selected, and during Trump's term, the two had a well-known falling out. However, Trump recently assured Bloomberg that he would not attempt to remove Powell before his tenure as chair ends in 2026.
At a Friday lecture in Peru, Barry Eichengreen, a professor of economics and political science at the University of California, Berkeley, suggested that Trump would try to restructure the Fed if it disagreed with the consequences of his policy decisions.
"In May 2026, President Trump would have the easier choice of selecting a more submissive Federal Reserve Chair,” according to Eichengreen. This person would not take any action to counteract the growing inflationary pressures, which would exacerbate them.
Nevertheless, speculators might significantly raise the price of taking the Fed by storm.
"You probably at the very least would see some market response to even the attempts to weaken Fed independence," according to Cato Institute trade policy specialist Scott Lincicome, and that might lead elected officials to rethink such moves.
(Source:www.reuters.com)
