Will the Fed blame Trump for higher inflation?
Donald Trump loves tariffs. On the campaign trail, he waxed poetic about them, saying:
“The most beautiful word in the entire dictionary of words is the word tariff. I love tariff. Most beautiful word in the dictionary is tariff. Tariff. It's the most beautiful word. I think tariffs are the most beautiful word. I think they're beautiful. It's gonna make us rich. They need a PR agent to straighten out that word. If I was Mr. Tariff, I would say, please get me a PR agent. I have to straighten out. It's one of the most beautiful words in the whole world. You have other words that are damn nice like love, but I tell you, I think it's more beautiful than love. It's more beautiful than love. More beautiful than love. More beautiful than respect. More beautiful than love. More beautiful than any word I know, tariff. I think I'll do this just so I don't get myself in trouble. Love is the most, and religion, they're the number one two. You can switch them back and forth any way you want. But the third most beautiful word is the word tariff.”
According to a recent CNN article, Trump "is considering declaring a national economic emergency to provide legal justification for a large swath of universal tariffs on allies and adversaries.” The emergency declaration would enable Trump to create a new tariff program using the International Economic Emergency Powers Act, known as “IEEPA.” The IEEPA authorizes a President to manage imports during a “national emergency”.
Trump is a fan of this law since it allows tariffs to be implemented without strict requirements proving they are needed on national security grounds. Trump used the IEEPA in 2019 to threaten a 5% tariff on Mexican imports that would rise to 25% if Mexico refused to act to reduce the number of illegal immigrants crossing over the border into the US.
Apparently Trump has never read economist David Ricardo, who explained a couple of centuries ago that tariffs lower living standards for consumers, since they are essentially taxes on imported goods. Thus, tariffs are counterproductive for the US economy, since it will be a new tax on US consumers. Of course, if Trump is able to use tariffs without actually implementing them as a way to bluff other countries into lowering their trade barriers, that would be positive for the economy. We will see how this all plays out.
How Does The Fed Feel About Trump & His Policies?
Clearly, there is no love lost between Trump and Fed Chair Jay “Transitory Inflation” Powell.
Thus, it is not surprising to see the Fed positioning itself to blame Trump for higher inflation going forward. Based on the minutes from the latest Fed meeting, the bureaucrats at the Fed are letting the public know they are concerned that Trump’s policies will lead to higher inflation.
Fed staffers incorporated “placeholder assumptions” about potential Trump policy changes that resulted in lower economic growth and higher inflation forecasts. “Almost all' Fed participants agreed that risks of higher inflation had increased and “some participants stated that there was merit in keeping the target range for the federal funds rate unchanged.”
The Fed is always looking for someone else to blame for inflation. But as Nobel Prize-winning economist Milton Friedman explained over 50 years ago, “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
Presidents, Congressmen and other politicians do not control the US money supply. Only the bureaucrats at the Fed do.
Higher tariffs and budget deficits, which are likely under Trump, can only lead to higher inflation in the long run if the Fed creates money out of thin air to “finance” them. If they do not do that, then higher prices on some imported goods will lead to lower prices on other goods and deficits will just taking scarce savings away from private investment. Both of those policies will lower US living standards. Printing money will simply lower living standards in a different way by causing higher inflation.
Investment Implications
What does this have to do with investing? A lot. If the Fed is going to blame Trump for an acceleration in inflation, then there will likely be a political battle over Fed interest rate policy, with the Fed wanting to raise rates and Trump wanting to cut rates. This could lead to greater uncertainty for investors. Uncertainty is not bullish for stock prices.
This is particularly true given how narrow the market is, with the largest stocks dominating the market more now than any time in history, including at the stock market peak in 1929, as this chart shows. Thus, we believe 2025 will be an “interesting” year for investors.
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