economy and politics

Inflation, a hard opponent for Trump

Donald Trump will face the difficult task of maintaining economic growth without causing greater inflation. However, your electoral promises will be difficult to reconcile with this ambitious objective without giving up several of your commitments.

According to several Pre -electoral surveysmany American voters perceived the economy as the key issue to decide whether they opted for the Democrats or the Republicans in the presidential elections of 2024. During the administration of Joe Biden, the US GDP grew constantly and unemployment reached levels reached levels Very low. However, for the first time since 2004, the Democratic Party lost the presidency, the popular vote, the House of Representatives and the Senate. This apparently paradoxical situation, according to Some commentatorsfind an explanation in the issue of inflation. From this perspective, a significant number of Americans would have voted for Donald Trump due to strong increases in experienced prices over the past four years, blaming the outgoing Democratic Administration for not sufficiently protecting the purchasing power of US citizens and companies.

During and after the electoral campaign, the tycoon has affirmed that it can stop inflation, emphasizing its plan to intensify the exploitation of national energy resources. This proposal, covered by one of the many executive orders signed by Trump when assuming the position, could help contain price increases, but it is unlikely to be a definitive solution. Likewise, its effectiveness could be largely compensated by inflationary pressures derived from other policies that the Republican politician has promised to apply.

American inflation, in descent but persistent

In the postpandemic phase, after almost a decade of significant stability of prices, US inflation began to increase pronounced, reaching a maximum of 9.1 % in June 2022 (interannual). Several factors promoted this increase. Without a doubt, as in the European case, the energy sector played a key role, affected by the economic recovery after COVID-19 and the outbreak of the war in Ukraine. In particular, the months in which general prices shot, agreed with important increases in energy costs. Similarly, as energy prices fell substantially, general inflation also began to decrease significantly.

However, many analysts believe that energy is not the only engine of this trend. In fact, although US inflation has decreased in recent years, it is still above Objective of the Federal Reserve (2 % annual) and increased to almost 3 % in the last quarter of 2024. According to Some economiststhis price trend finds two additional causes in the labor market and fiscal policy. In this sense, an unemployment rate slightly greater than 4 % has created the conditions for salary increases to drive up rise inflation. At the same time, the persistence of highly expansive fiscal policies has led to progressive overheating on the demand side, which in turn contributes to the increase in price levels.

In the light of these considerations, in recent months, the Federal Reserve (FED) has cautiously reduced interest rates – increasing in various percentage points during the peak of the inflation crisis – and has refrained from “promising” significant cuts of the cost of money by 2025.

The costs of Trumpnomics

Donald Trump and his designated secretary of Commerce, Howard Lutnick, identified a massive increase in tariffs – very superior to those applied between 2017 and 2020 – as a cornerstone of the economic policy of the new administration. It is not clear if these major import taxes will be applied or if they will be used simply as a negotiation tool in international debates. However, if the tycoon is even partially consistent with its declared intentions, it is reasonable to affirm that a significant increase in tariffs would create additional inflationary pressure on the US economy. In fact, among scholars it is widely accepted that the increase in commercial barriers and the increase in the cost of imported goods inevitably lead to a general increase in price levels.

At the same time, the previous presidency of Donald Trump demonstrated a lack of inclination towards a strict budget discipline. In fact, between 2017 and 2020, the relationship between the federal deficit and GDP progressively deteriorated, largely due to fiscal cuts outlined by the Republican Administration (consider, for example, the Law of Fiscal Cuts and Jobs). Although the new Treasury Secretary, Scott Besent, has declared his goal of reducing the 3 %deficit/GDP ratio, the promises of the magnate to maintain and strengthen tax cuts suggest that it is unlike Budget deficit of the US decreases significantly in the coming months (it currently exceeds 6 %). This persistent ultra -expansive economic policy would further heat demand and, consequently, increase inflation further. Similarly, the continuous expansion of US public debt could logically lead to higher interest payments on treasure bonds, exerting additional pressure on the Federal Reserve to intervene with purchases of federal bonds, which could contribute to the increase in Price levels.

The capacity of the new US administration to contain inflation will have direct repercussions in Europe. In fact, despite the fact that the European Central Bank has affirmed its independence from the decisions taken by the Federal Reserve, it seems unlikely that the ECB does not take into account the dollar-European exchange rate and the interest rates set by the reserve Federal, given the important impact Of these two variables in the European economy: a consequence of the size of the American GDP and the dominant and still solid paper of the dollar.

The independence of the Federal Reserve

In this context, the Federal Reserve is in a difficult position. In fact, persistent or possibly growing inflation would force the Federal Reserve not to go down, or even rise, interest rates. A decision of this type, aimed at cooling the demand, would have an impact on the economic cycle, affecting the unemployment rate, the growth of GDP and the exchange rate between the dollar and other currencies (potentially appreciating the US currency in detriment of exports).

During his first term, Trump showed great discontent with the Federal Reserve decisions to raise interest rates, repeatedly attacking Jerome Powell and indicating, more or less explicitly, his disapproval of the high degree of independence of the Central Bank with Regarding politics. The “discomfort” of the White House with the autonomy granted to the Federal Reserve is not a novelty of Trump’s presidency: Richard Nixonfor example, he put a close ally (Arthur Burns) at the head of the Federal Reserve, in order to maintain the low types and improve his re -election prospects; Lyndon Johnsonon the other hand, President William McChesney Martin literally pushed against a wall, accusing him of refusing to “print money” during a critical phase of the Vietnam War.

However, Trump, in this matter as in many others, raised the institutional conflict to unprecedented levels. Over the years, the tycoon has systematically and publicly attacked the decisions of the Federal Reserve, and, as reported, several advisors of the 47th President even They have considered dismiss Powell prematurely or propose coordination between treasure and the Federal Reserve in fixing interest rates. However, both options (which could significantly reduce the independence of the Federal Reserve and undermine their goal of achieving price stability) are very difficult to implement. The first seems, from a legal point of view, difficult to carry out and, although it was successful, it would not necessarily lead to a drastic change in the orientation of the Federal Reserve, given that the Federal Open Market Committee (FOMC), the Organism that makes monetary policy decisions, is composed of twelve members with the right to vote. The second, the coordination between the Federal Reserve and the Treasury to set the types, would require an amendment to the Federal Reserve Law, which would demand a majority in both Chance of Congress, which, due to the obstructionism of the Senate and the possible Opposition of some Republicans would be difficult to achieve.

In this scenario, it is reasonable to expect Trump to be forced to accept the continuous independence of the Central Bank of the Executive, resorting to attacking it with noisy statements in the hope of influencing some members of the FOMC. Such a situation could facilitate the containment of inflation, but would undermine the ambitious objectives of economic expansion promised by the tycoon.

In search of a complex balance

For the next four years, Donald Trump will face the difficult task of maintaining economic growth without causing greater inflation. However, their electoral promises will be difficult to reconcile with this ambitious objective: without giving up several of its “commitments”, balance low unemployment, prices stability and GDP growth can be complex. American voters have deposited their confidence in the supposed ability of the tycoon to manage the economy better than Biden and Harris. If the results deviate from the promised, it would be logical to expect negative repercussions on the approval rates of the 47th President, although the logic does not always apply perfectly in politics, especially when it comes to someone like Donald Trump.

Article translated from the English of the website of the INTERNALI AFFARI ISITUTO (IAI).

Source link