Trump’s economic policies – protectionism accompanied by fiscal spending and tax cuts – has bumped up the risk assets across the globe… especially US stocks, which are enjoying a record breaking run.
Though the markets have cheered Trump’s agenda, economists are questioning how Trump intends to finance his spending plans. Furthermore, economists and politicians across the globe and even in the US stand unanimous when it comes to criticizing Trump’s protectionist agenda.
The Federal Reserve has stayed apolitical, but could be a silent cheerleader of Trump’s program!
Protectionist policies boost inflation
History shows protectionist trade policies can stoke inflation. In 1994, the World Trade Organization had said: “Virtually all protection means higher prices.” Global trade and free movement of goods and services helps match demand and supply and thus keep price pressures under control.
Protectionist policies like high tariffs do the opposite. US President George Bush noted in his 1992 economic report to Congress: “Trade barriers not only raise the price of imported goods to consumers, but also the price of domestically produced goods that compete with these imports.”
Fiscal spending to boost growth
Commodity prices are already enjoying a positive rub from the talk of fiscal spending in the US. During the speech to congress on Wednesday, Trump talked about $1 trillion spending program. This marks a major shift from austerity to fiscal boost. This would not only boost inflation, but also push up growth rate in the US.
Now think what Fed wants to have – a combination of higher inflation and higher growth.
This is a blessing in disguise for Fed because –
Fed needs to raise rates and remain ready for next recession! – Fed kept interest rates at record low of 0.25% till December 2015. Over the 6-7 year period, the Fed did three rounds of QE, operation twist. However, the economic recovery has been anything but encouraging.
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