Financial markets — and some real estate executives — have been cheering the potential for stronger economic growth under a Trump administration, but two leading economists have their doubts it will come to that.
Robert Gordon, a professor at Northwestern University, argued that Trump’s plans to boost public spending in an economy that is already near full employment will simply lead to higher inflation. This could in turn prompt the Federal Reserve to raise interest rates more quickly, putting the brakes on growth.
“I see a likelihood for a major clash developing in the next year, year and half, between the Trump administration’s desire to go for 3 to 4 percent growth and the growing attention of the Fed to emerging inflation in their own 2 percent mandate,” Gordon said. He added that this makes it unlikely Trump will reappoint Yellen when her term is up in 2018.
“The appreciation of the dollar that comes with the higher interest rates is going to cause an increase in the trade deficit and undermine his own desire to reduce the trade deficit. We’re going to have major impediments to Trump’s achieving his goals for growth,” he said.
Barry Eichengreen, a professor at the University of California at Berkeley, predicted that we could see “double-digit” growth in the dollar’s exchange rate as higher interest rates attract more capital from abroad.
“There’s the danger that markets and the global financial system aren’t prepared for the consequences,” he said. [Bloomberg] — Konrad Putzier