US President-elect Donald Trump campaigned on promises of aggressive import tariffs, tough immigration restrictions, re-regulation and smaller government, but the economy he inherits next week may need something different. writes Reuters.
With output growing above trend, the labor market near maximum employment and job additions, and the embers of inflation still smoldering, Trump can launch his promised reforms in an economy that is least in need of the kind of stimulus provided by his 2017 tax cuts.
As a sell-off in stocks following last week's strong December jobs report indicated, it may also be prone to a correction given high asset values and the bond market that has moved to higher levels.
"Success for the Trump administration would be not to damage the economy with exceptional performance that it is inheriting," said Mark Zandi, chief economist at Moody's Analytics, Telegraph reports.
In their view, the planned combination of tariffs, deportations and deficit-financed tax cuts "will do harm and depends on how aggressively these policies are pursued."
Trump will take office next week in vastly different economic circumstances than when he began his first four-year term in 2017.
"The constraints are different, starting with inflation," which is not yet fully contained by a pandemic-era surge and has shown little year-over-year improvement in recent months, said Karen Dynan, professor of economics at Harvard University.
Trump also faces larger federal deficits and higher government borrowing costs than before, and a labor force that has grown faster than expected due to immigration, something Trump wants to curb.
Referring to the U.S.'s recent performance that has outpaced that of other developed countries and surprised many economists, Dynan said that "if you believe that above-trend economic growth comes from immigration, it's going to be hard to get numbers that as big as we saw in the last part of the Biden administration".
When Trump first entered the White House in 2017, the economy had been growing steadily since the end of the 2007-2009 financial crisis, but the pace was often slow and employment had not fully recovered.
There was room for the boost of Trump's signature Tax Cuts and Jobs Act, and while the import tariffs that followed dealt a blow to the global economy, the US proved largely resilient.
What had been the longest US economic expansion in modern times ended only when the COVID-19 pandemic began in March 2020.
Inflation was a distant concern at the time, seemingly anchored below the Federal Reserve's 2% target. Homebuyers could find 30-year fixed-rate mortgages at about 4%, and the government was funding its operations with long-term Treasury bond rates at about 3%.
Today, inflation is dependent on the Federal Reserve's target, mortgage rates are close to 7%, a fact that may reflect market doubts about whether inflation is contained and about the continuation of US financial discipline.
"There's still a concern that inflation may not be contained. We're going to fix that problem, so don't worry about it," Fed Governor Christopher Waller said last week about the hike in long-term bonds.
But “the other thing that's getting more and more attention is the concern about fiscal deficits... If that doesn't look like it's going to change going forward, at some point markets will demand a premium. That's starting to be what we're seeing," added Waller
While Trump has created an unofficial Department of Government Efficiency to find savings, there is no plan to address the main drivers of the deficit: the health and retirement benefits for seniors that both political parties hold sacred.
If government borrowing costs and the vigilance of bond markets present one set of potential constraints for Trump, the state of the economy may present another.
The key data that Fed staff and officials watch, including numbers on employment, inflation, consumer spending and overall growth, may not offer much room for improvement without risks.
The unemployment rate in December was 4.1%, for example, near or below many estimates of what is considered sustainable without generating inflation, and the economy gained an impressive 256,000 jobs.
As wages rise, consumer spending remains healthy. Inflation is trending lower but is still more than half a percentage point above target, with concerns that it could be reignited by any aggressive moves to boost output that may already be outstripping potential or by the added costs of such things such as fees.
"The US economy is doing very, very well," Fed Chairman Jerome Powell said at a Dec. 18 news conference at the end of the central bank's latest policy meeting.
"We have to stay in office, though," with monetary policy remaining tight enough to return inflation to 2% while keeping the labor market intact.
Between Trump's plans and the strength of the economy, there are growing doubts about whether the Fed will be able to cut rates much further.
The uncertainty about what lies ahead is rooted in the gap between Trump's broad rhetoric about what he seems to think the economy needs, and actual economic performance over the past year in particular.
The Fed's meeting last month saw staff begin to suggest slower growth, and higher unemployment could be the immediate result of expected trade and other policies.
Policymakers have publicly highlighted the uncertainty they are facing, while also attempting a balance.
Noting that businesses themselves have been optimistic about future conditions, despite potential disruptions from tariffs and deportations, “I expect more upside than downside in terms of growth,” Richmond Fed President Tom Barkin said last week, though he also acknowledged potential inflation risks. /Telegraph
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