The Federal Reserve (and every other major central bank in the world) has been begging their government for years to implement fiscal stimulus to match their monetary stimulus, All the money printing in the world can’t reach the “real” economy if the government doesn’t help boost demand.
Now, it seems that the most unlikely hero is riding to the Fed’s rescue: Donald J. Trump.
One of the big planks in Trump’s campaign platform was a huge program to rebuild the nation’s broken infrastructure. This plan, which could total as much as $1 trillion, will be accompanied by across-the-board spending cuts. The result will be a massive jump in deficit spending. This flood of new government debt (bonds) will push yields higher, allowing (forcing?) the Fed to raise interest rates in tandem.
Hiking rates will not only give the Fed some interest rate maneuvering room in the event of another economic downturn, it will also help the nation’s banking sector. The Fed’s zero interest rate policy has pushed the yields on loans and mortgages so low that banks have been struggling for income.
Early Payoff From Trump Policy
Trump’s January 20th inauguration is still more than two months away, but his proposed policy plans already have banking, energy, and infrastructure-related stocks soaring. In the same vein, a selloff on government debt has Treasuries yields spiking. Additionally, Industrial metals are seeing prices vault to levels not seen in years.
This gives the Fed plenty of reasons to raise benchmark interest rates next month. It will have to act quickly to stay ahead of the inflation curve that is already steepening in anticipation of the actions of a Trump Administration.
One Fed official that is already expressing his approval of recent events is St. Louis Federal Reserve President James Bullard. He said that the Republican sweep of the White House and Congress “certainly breaks gridlock in Washington, which has been a key complaint about how the economy has operated.”
Can Gen. Trump Rally His Troops?
Bullard’s opinion may be more sanguine than the reality. As wildly popular as Trump’s agenda was on the campaign trail, he will doubtlessly run into problems getting his budget-busting plans past Tea Party members of the House and Senate. Even if he follows through with his pledges to end Obamacare and the Dodd-Frank Act, Trump may not gain enough political capital to get budget hawks to sign off on everything in his massive deficit spending program. Regardless, Trump will come away with something.
Even though there will be bumps in the road, Trump is giving Janet Yellen something that the ECB’s Draghi and Bank of Japan’s Kuroda can only dream of: A government on the same page as its central bank in stimulating the economy.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.