What a Trump victory could mean for Fed policy
The Federal Reserve's decision on Wednesday to cut interest rates by half a percentage point is widely seen as the start of a cycle of easing monetary policy. The big question is: How will this year's election affect the pace and extent of Fed rate cuts?.
The Wall Street consensus is Mixed Results in NovemberThere would be no significant impact if one party controlled the White House but faced majority opposition in the House and/or Senate, in which case the Fed would likely pursue the path outlined in its economic outlook.
If Republicans win by a landslide In November? Trump's proposed fiscal package is unlikely to cause inflation, as it is primarily a continuation of tax cuts implemented in his first administration. These tax cuts did not lead to higher inflation during his presidency, and are unlikely to lead to higher inflation in his second administration. The new tax cuts at the individual level may provide some additional purchasing power to the household sector, but not enough to cause serious inflationary concerns.
of Corporate tax cuts The policies mentioned by Trump are likely to stimulate real growth (increase investment and supply) without being inflationary. Similarly, removing restrictive government stances on fossil fuels may stimulate employment and investment, but any inflationary stimulus would likely be more than offset by the supply-side effects of lower energy prices and energy abundance.
Tariffs and immigration restrictions do not cause inflation
So Tariff IssuesA recent survey of economists from the Chicago Booth School found that most economists believe some of the costs of tariffs will likely be passed on to consumers, though that didn't happen the last time President Trump imposed tariffs.
However, this is a temporary increase in the price level of imports that will need to be offset by price declines in other parts of the economy. The general price level is likely to remain unchanged. No need for further tightening of monetary policy This runs counter to the claims of some analysts and experts who believe the Fed would keep interest rates high if Trump wins in November.
What about immigration? While some economists have expressed concern that restricting border crossings or deporting illegal immigrants would raise labor costs (a surprising claim given that many economists have long argued that immigration does not depress the wages of U.S. workers), there is little evidence that this would have an inflationary effect. Decreasing number of low-skilled workers But this is more than offset by falling demand for housing, food, fuel and transport, suggesting that more restrictive immigration policies will have a deflationary weight.
Ironically, the logic of those opposed to tariffs and tougher border policies is If Trump wins, the Fed should cut rates furtherIf tariffs or immigration restrictions were dragging down growth, the appropriate response would be more accommodative policy: the Fed would view temporary price increases as temporary and try to offset the drag with easier policy.
Even if you don’t agree that tariffs and immigration restrictions are a drag on the economy (and we certainly don’t), Trump’s mix of tax cuts, regulatory reform, and economic nationalist trade and border measures could have a negative impact on the economy. It will bring about non-inflationary growth. This would result in lower interest rates than would be the case under a Biden-Harris administration, although they are unlikely to be as low as they were in the pre-pandemic era, when interest rates were recovering from the Fed's long-term zero interest rate policy. Lower than the past two years.
Kamala Harris' views on climate and equity are inflationary
On the other hand, if the Democrats win by a large margin, it will bring about inflation. Spending will rise and tax increases are more likely to hit investment and savings than consumption.The uncomfortable truth for Democrats is that the inflationary effects of higher spending cannot be offset by taxes on the wealthy: even if higher taxes technically reduce the deficit, aggregate demand does not fall because the wealthy saved the money they taxed rather than spending it.
Vice President Kamala Harris delivers a speech marking the one-year anniversary of the Controlling Inflation Act in Seattle on August 15, 2023. (Official White House Photo by Polly Irungu via Flickr)
Furthermore, increased taxes and stricter regulations discourages investment and reduces supply The central focus of government policy is Climate Change and Equity It causes inflation in both the short and long run. War and World ConflictThese policy interest rates, which have increased significantly under the Biden-Harris administration, are also likely to continue to provide inflationary stimulus to the economy.
In other words, President Harris Rising inflation and interest ratesBoth could happen, especially if the Fed fails to anticipate the inflationary effects of the Democratic agenda from the start, is forced to jump ship and raise interest rates to tame runaway inflation.
The results were Housing prices continue to soar Falls in housing, autos and large durable consumer goods have left Americans deeply dissatisfied with the Biden-Harris economy.
Federal Reserve policy is not scheduled to be formally voted on in November, Interest rates over the next four years could be determined by the election outcomeA Democratic victory would likely lead to higher interest rates and inflation, while a Trump and Republican victory would lead to lower interest rates and inflation.
