Donald Trump’s proposed policies have bond vigilantes worried.Credit:AP
Former Australian Reserve Bank economist Warwick McKibbin has argued that Trump’s policy would materially reduce the supply of low-cost labour in the US mining,agriculture,services and manufacturing industries.
His modelling has projected that US real GDP would be reduced by between 2.1 per cent (if 1.3 million migrants were deported) and 12 per cent (if 7.5 million,or half the lower end of Trump’s target range,were deported) and said both scenarios would ignite “serious” inflation.
When the impact on deficits,debt and tax on US inflation of those core policies are combined,you can understand why the bond vigilantes are starting to become restless.
There’s an additional layer to their agitation. Trump is no admirer of the Fed or its chairman Jerome Powell. He wanted to get rid of Powell during his last term and tried to stack the Fed with his own (quite peculiar) nominees but failed.
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His advisers are known to have been working on schemes to either gut the Fed or bring it under the White House’s influenceor even control,with the Fed obliged to consult and take account of the president’s views on interest rate moves.
An independent Fed would respond to a new outbreak of inflation by raising the US interest rate to whatever level was required to bring it under control. If Trump’s team was able to get any level of control over the central bank,inflation would be higher – potentially,given the nature of Trump’s agenda,far higher – than it would otherwise be.
Trump’s policies,if implemented,would be disruptive and potentially quite damaging to the US (and global) economy.
Credit:Matt Golding
Left unchecked by the Fed,inflation could reignite while the economy stalls or shrinks,which is why former US Treasury secretary,Larry Summers,has said the policies are “a prescription for the mother of all stagflations,” or an economy with high inflation,low (if any) growth and high unemployment.
It is little wonder that the bond vigilantes think they might have to take matters into their own hands if Trump prevails in November and proceeds to try to implement his key policies.
If the Fed isn’t willing or able to drive up interest rates in the event of a new outbreak of inflation they have demonstrated in the past that they are more than capable of doing that themselves,even if they have to drive the economy into the ground to impose their will.