A second Trump term could actually make inflation worse 

With less than six months to go until the presidential election, Donald Trump Leading in key battleground statesInvestors and the public are fixated on high inflation.

Inflation was low during Trump’s term, and Biden’s economic policies are widely seen as the cause of the dramatic price increases over the past three years, leading many to speculate that inflation would be lower if Trump were to win the presidential election than if Biden were re-elected.

However, this assessment may go wrong for two reasons.

One thing to consider is that global inflation was much lower during Trump’s term than it is today: from 2017 to 2020, for example, consumer price inflation averaged just 1.5% per year in developed countries (1.8% in the US). International Monetary Fund Data.

Furthermore, at the time, both the Bank of Japan and the European Central Bank were concerned about the threat of price deflation, Negative interest rate policyMeanwhile, US interest rates were low but positive.

The COVID-19 pandemic has caused inflation to spike in the United States and abroad. Supply Chain Shortages Policies to combat rising unemployment. Although inflation has eased considerably over the last year, U.S. inflation has been strong recently. 3 to 3.5 percentIf inflation remains high and Trump wins the election, he will have to deal with inflation above the Fed’s 2% target for the first time.

A second consideration is that the economic policies being considered by President Trump and his advisers could exacerbate inflation.

In a recent Project Syndicate commentary, former IMF chief economist Maurice Obstfeld argued: Several policy proposals put forward by President Trump’s advisers 1970s-style inflation would return. One proposal would give the president more influence over the Fed’s interest rate decisions and rulemaking, while another calls for weakening the U.S. dollar to reduce the U.S. trade deficit.

of Proposal for Federal Reserve Independence He was quoted in a Wall Street Journal article that said a group of President Trump’s allies had prepared a secret document outlining how he would be consulted on interest rate decisions and how Fed regulations would be subject to White House review.

While this story has not been substantiated, President Trump has long supported low interest rates to stimulate the economy. During his presidency, he He openly criticized the Federal Reserve. President Trump refrained from challenging the Fed’s independence by not pursuing a negative interest rate policy as Japan and the European Union have done, but he did so in order not to upset financial markets.

Proposals on International Trade and the Dollar There have been ties to Robert Lighthizer, the Trump administration’s special trade representative and nominee for Treasury secretary, who was also a key figure in Trump’s decision to impose higher tariffs on China and other trading partners.

More recently, Lighthizer wrote a book that foreshadowed an even bolder stance: The goal is to completely eliminate world trade imbalances.He would do so by devaluing the dollar and raising tariffs across the board.

Obstfeld counters that because the U.S. economy is already at full employment and the Fed is trying to keep inflation down, policies aimed at weakening the dollar and raising tariffs would make imports more expensive and thus fuel inflation. In my view, such policies would also pose risks to the bond and stock markets.

Also, large-scale intervention in the foreign exchange market is not an effective means of weakening the dollar. The final attempt to weaken the dollar would be The Plaza Accord of 1985since then, Forex market daily trading volume It has soared to nearly $8 trillion, making coordinated intervention unrealistic today.

That means the most effective way to influence the dollar would be through a change in monetary policy. But if the Fed eases monetary policy prematurely, that could backfire, causing investors to sell off dollar-denominated bonds and pushing up bond yields.

As Obstfeld points out, the main reason inflation has retreated from its highs is because the Federal Reserve has aggressively raised interest rates and kept them at high levels.

he Conclusion“These positive developments would not have been possible in a world where monetary policy is politicized, subject to presidential control, and focused on the external value of the dollar rather than its more important internal value.”

The most obvious example of White House interference in monetary policy occurred before the 1972 election. President Nixon pressured Federal Reserve Chairman Arthur Burns to keep interest rates low. Due to an increase in the money supply and an accelerating economy, inflation rose to nearly 10 percent after wage and price controls were lifted in 1973. The collapse of the Bretton Woods system A fixed exchange rate was introduced, followed by a decade of financial market turmoil.

With these considerations in mind, investors need to gauge how aggressively Donald Trump would tackle inflation if elected president. While Trump benefited from a benign inflationary environment globally during his presidency, there is little to suggest that his policies have contributed to low inflation in the U.S. He has increased the federal debt by $8.4 trillion, encouraged the Federal Reserve to cut interest rates, and Raising tariffs This raised import prices.

The main risk going forward is that the Fed could face political pressure to cut interest rates, and if proposals by President Trump’s advisers are implemented, global investors could lose confidence in the dollar.

Dr. Nicholas Sagen is an economic consultant and affiliated with the University of Virginia Darden School of Business. He says:“Investing in the Trump Era: How Economic Policies Affect Financial Markets”