President-elect Donald Trump’s plans to increase trade protectionism and reduce immigration could be highly inflationary for the US economy, experts warn.
Donald Trump’s victory in Tuesday’s US presidential election could have the Federal Reserve scrambling to hike interest rates if he enacts some of his more inflationary policies.
Policies such as protectionism and cutting immigration (thereby reducing the labour force) are likely to see the Federal Reserve raising interest rates “much more aggressively” than markets are currently expecting.
That’s the view of Colonial First State Global Asset Management chief economist Stephen Halmarick, who said Mr Trump’s “anti-trade policies and commitment to increasing tariffs” are likely to be negatives for US economic growth.
Within a year of Mr Trump’s presidency, the US economy could be heading towards a recession with the US dollar, bond yields and equity markets all likely to decline, Mr Halmarick said.
Colombia Threadneedle Investments head of equities Mark Burgess agreed that trade protectionism is the “biggest economic fear” stemming from a Trump presidency.
“Expectations of inflation in the US have already turned and protectionism will accentuate those fears,” Mr Burgess said.
“Ultimately, monetary policy uncertainty, protectionism and fiscal easing are not a recipe for lower rates.”
During the fractious presidential campaign, Mr Trump also pledged to cut the corporate tax rate from 35 per cent to 15 per cent. He laid out plans to pursue wide ranging infrastructure spending.
Both fiscal measures – while unfunded and likely to add significantly to the Federal deficit – have received broad support across the political and economic spectrum, according to Vanguard chief economist for the Americas Roger Aliaga-Díaz.
“Economists of all colours basically have been supporting the idea of some sort of tax reform – particularly corporate tax reform. Infrastructure spending, also that goes with that,” Mr Aliaga-Díaz said.
“Those are the most concrete policies that I would say would receive attention from Congress.”
AMP Capital chief economist Shane Oliver said the “Reaganesque” combination of big tax cuts and increased defence and infrastructure spending would boost the supply side of the US economy.
“The downside though is that this will blow out the budget deficit and the risk is that his protectionist policies will set off a trade war and, along with much higher consumer prices and immigration cut backs, will boost costs,” he said.
Stimulate new ideas. Stimulate new thinking. Top up your CPD and hear from industry experts with InvestorDaily’s Knowledge Centre. Keep up to date with the latest trends and reforms, all while adding to your CPD. Explore the knowledge centre Knowledge Centre now.
Despite unemployment falling to pre-pandemic levels, the central bank still thinks it’s too early to count its chickens on the success of ...