Implications of Trump for monetary policy?
By Scott Sumner
It’s difficult to know what Trump will do about monetary policy, or any other issue for that matter. Lars Christensen has suggested that inflation expectations are rising due to the perception that Trump will do massive infrastructure spending. (And a follow-up post here.)
I don’t know whether a Republican Congress would approve a massive increase in government spending, although it’s certainly possible. (When have political parties ever stuck to their principles?) But even if they do, I would not expect any significant increase in inflation—beyond what the market already expects. (A tiny increase is possible.) The reason is simple—the Fed is committed to a 2% inflation target, and there are no signs that they are about to back off.
In fact, there is a widespread expectation that the Fed will raise rates by 0.25% in December, precisely for the purpose of keeping their inflation forecast for 2018 close to 2%. If Trump gets an infrastructure plan approved, it will boost real interest rates by a few basis points—nothing dramatic—but that won’t have any significant impact on inflation expectations. As long as they target inflation at 2%, demand-side fiscal policy is a nonstarter.
In my view, a better argument is that the possibility of tax reform and deregulation is boosting RGDP growth forecasts slightly, and that this is raising longer-term real interest rates.
Some commenters ask me whether Trump would favor NGDP targeting. I have no idea, and don’t really think the question is very interesting. In our system, the President does not choose a specific inflation target. Instead, Congress gives the Fed a rather vague mandate (stable prices and high employment, etc.) and the Fed decides how to implement the policy.
Over time, the Fed’s actions have tended to reflect the consensus view of macroeconomists. You don’t change policy by changing a President; you do so by changing the views of economists. The number of distinguished economists who favor NGDP targeting is gradually rising, but we are still a few years (or even decades) away from an actual policy change. Trump is a side issue in the monetary realm—we should focus our attention on how he feels about trade, regulation, immigration, taxes, foreign policy, etc.