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Hold onto your hats: As Trump 2.0 nears, we should be afraid. Very afraid.

By Remy Davison - posted Thursday, 14 November 2024


Shots have already been fired between the current Fed Chair, Jerome Powell, and Trump. In 2018, Trump refused to reappoint Janet Yellen, currently Biden’s Treasury Secretary, to a second term at the Fed.

Instead, Trump appointed Powell, who has proven fiercely protective of the central bank’s independence. Powell has already stated any attempt to fire him would be unlawful. But Trump and Congress could undermine him by appointing yes-men and women to the Fed’s board of governors.

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Send in the clowns

The core problem is Trump is attempting an impossible trinity. He’s promised to reduce inflation. To accomplish this, the Fed must maintain monetary discipline via a tight interest rate regime.

But Trump’s economic policies will undermine the federal budget and blow out the deficit, forcing the government to borrow more to fund federal expenditures. Thus, the inherent contradictions in Trump’s policies are self-evident – inflation and interest rates cannot be reduced simultaneously.

In any event, the Fed has charted a clear course in the past few months. It’s initiated two major cuts of 0.50% in September and 0.25% in November, in order to induce a soft landing and avoid a US recession.

But Trump wants interest rates to fall further and faster, which itself would again release the inflation genie out of the bottle.

Certainly, if the Ukraine and Middle East conflicts end, this will remove some inflationary pressures, but the concept that inflation can simply be eliminated at a stroke is illusory.

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Moreover, this cornucopia of smoke and mirrors cannot disguise the fact that the Trump tariffs, if implemented, will ramp up price pressures further on US businesses and households, which depend on cheap Chinese exports.

Trump’s campaign promise to cut taxes and make up the difference with tariff revenues doesn’t pass muster; tariffs make up little more than 2% of all federal revenue.

Border crossings also feed into the economic debate. The US economy relies upon a steady stream of both formal and informal migrant labour. But Trump’s announced mass deportation plans for undocumented migrants could see one million persons deported per annum.

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About the Author

Remy Davison is Jean Monnet Chair in Politics and Economics at Monash University. He is a Global Expert for the United Nations, New York, and a former member of the Council on Optimising Government Performance.

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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