I’ve expressed a lot of frustration with the way that pundits have been ignoring monetary offset. Thus it’s worth praising one who does not. Here’s Matt Yglesias:

Indeed, Fed officials are signaling clearly that more stimulus will mean more rate increases. This is a little bit disguised by the fact that Fed officials are saying they welcome the idea of stimulus. But they aren’t saying stimulus will increase growth. They’re saying it will increase interest rates.

On November 21, Fed Vice Chair Stanley Fischer argued that more stimulus would allow for faster rate increases, which would be good because it would let the Fed cut interest rates in response to future economic problems.

On November 29, Jerome Powell, another Fed board member, argued that more stimulus would allow for faster rate increases, which would be good because it would curb speculation.

Patrick Harker from the Philadelphia Federal Reserve, who’ll be rotating onto the monetary policy committee in January, says he wants to see interest rates go up. Robert Kaplan from the Dallas Fed says the same thing.

Trumponomics will shift activity, not boost it

Given this Federal Reserve regime, there’s very little chance that we’ll see some kind of Trump boom next year. JP Morgan doesn’t think the Fed will fully offset Trump’s stimulus, leaving us with 1.9 percent GDP growth in 2017 plus inflation peaking above 2 percent in the second half of the year. My best guess is that the Fed is a bit more hawkish than that and will keep both growth and inflation a little lower.

But either way, in a war between fiscal policy and monetary policy, the central bank always wins.

Trump will end up giving us less private economic activity in interest-rate sensitive areas like homebuilding and car purchases, offset by more infrastructure activity and more consumption from the affluent beneficiaries of his tax largess.

There’s still the question of supply-side effects, which would not be offset by the Fed. It’s possible that Trump’s policies will boost growth, particularly if he focuses on supply-side policies like tax reform and deregulation, and not on anti-growth measures like protectionism and immigration restriction.

Of course Congress also has a say in these issues. One sliver of good news came out yesterday:

Kentucky Sen. Rand Paul gave an indication today of the trouble that President-elect Trump may face from his own party in trying to fulfill campaign promises that cost money.

The former GOP presidential candidate said on ABC News’ “This Week” that he “won’t vote for a budget that never balances” and that he is working to find a few other conservative GOP senators to join him.

This would push against massive infrastructure spending by the Federal government, and also push Congress toward making any tax reforms “revenue neutral”.

In fairness Trump himself recently endorsed one useful form of spending control:

Trump tweeted Monday morning that “the F-35 program and cost is out of control. Billions of dollars can and will be saved on military (and other) purchases after January 20th.”

Shares of Lockheed Martin (LMT), which makes the F-35 fighting jets, plunged 4% following Trump’s tweet.

Defense experts often point to the F-35 program (expected to cost at least $400 billion) as one of the most wasteful forms of defense spending.

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PS. If you go to Matt Yglesias’s article, you’ll see lots of links to the comments of various Fed officials.

Ramesh Ponnuru has an excellent article on the same topic.