Scott Sumner  

Implications of Trump for monetary policy?

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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.


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COMMENTS (13 to date)
Justin writes:

--"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."--

Trump might be the exception to the rule as far as the Presidential impact on Fed policy goes. I don't see him as being above threatening the Fed's independence or promoting things like an audit to get his way.

If Trump can be convinced of the merits of NGDP targeting (and America's track record of a recession every 10 years or less might well make it something he'd at least consider), maybe he could persuade the Fed to adopt it.

Julien Couvreur writes:

What do you mean "what Trump will do about monetary policy"?

Isn't monetary policy the purview of an independent central bank?

Scott Sumner writes:

Justin, I'd be really opposed to the President telling the Fed what to target, even if it were NGDP. Fortunately, in our system the Congress sets the mandate, and I very much doubt that they'd give Trump that power, nor should they. (Getting 50 votes in the Senate would be tough.)

Julien, Yes, see my previous response.

Maurizio writes:

Prof. Sumner, does this make sense?

"The 30-year Treasury yield hit an 11-month high of 2.960% as Trump’s stimulus plan seen stoking inflation."

How can stimulus cause inflation? Isn't inflation controlled by the central bank?

Or are there circumstances where the central bank might not want to do monetary offset? (I am thinking of cases like: rates are -1, but the central bank would like them at -3, but can't reach -3, so does not offset fiscal stimulus).

IGYT writes:

Some market participants likely also believe that Fed independence is in danger. This is the sort of political circumstance where, if money seems tight and we enter a recession, Trump could lead a scapegoating campaign that truly ends that independence. Minimizing that risk may render them a bit more inflation tolerant already. Of course, too much inflation would also get them trouble, but perhaps right now that seems the lesser danger.

Scott Sumner writes:

Maurizio, I may be wrong, but I expect the fed to continue targeting inflation at 2%. I think it's unlikely that Trump will "stoke inflation". More likely, real interest rates may rise as a result of his policies.

IGYT, More inflation now makes a recession more likely in the next 5 years.

Jeff writes:

Scott, there are currently two vacancies on the Federal Reserve Board of Governors, so Trump could have an immediate impact by filling those seats. It used to be that only the 12-member (currently 10-member due to the vacancies) FOMC really set monetary policy, but with the advent of interest on reserves, that's not really true any more. The interest rate paid on reserves is legally set by the Board, not the FOMC, and so two Trump appointees could bring more pressure than you might think. With the world awash in excess reserves, the Fed Funds rate can't really be targetted much higher than the IOER rate.

jj writes:

Scott,

If Trump asked you to be his Fed Chairman, would you accept that job?

Scott Sumner writes:

Jeff, Technically you are right, but in practice the FOMC continues to set the IOER. So in practice you are wrong.

JJ, No, but that would be true for any president, not just Trump. I'm not qualified for the job, as currently structured.

Andrew_FL writes:

Helicopter drop Vince McMahon's money!

I might've offered a serious suggestion, if I wasn't on permanent ignore for calling you out on your ideology.

bill writes:

This was something Trump mentioned in Gettysburg. I believe these were Ivanka's ideas. Anyway, things like this won't make the tax code simpler.

Affordable Childcare and Eldercare Act. Allows Americans to deduct childcare and elder care from their taxes, incentivizes employers to provide on-side childcare services, and creates tax-free Dependent Care Savings Accounts for both young and elderly dependents, with matching contributions for low-income families.

Jeff writes:

So tell us, Scott, just how are you wrongly structured? :P

Thaomas writes:

You did it again

the Fed is committed to a 2% inflation target,

By it's behavior, the Fed is not committed to a 2% inflation target; is it committed to a 2% inflation ceiling or is politically constrained from taking the actions necessary to keep inflation at 2%.

If Trump Republicans want to do a lot of infrastructure spending I would not be surprised if the Fed DID accommodate this by allowing the inflation rate to exceed the 2% ceiling for a while, maybe even enough to get back to the 2% price level trend.

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