The Mortgage Corner
The Federal Reserve on Wednesday raised a key U.S. interest rate for the first time in a year and signaled a more aggressive approach in 2017—with maybe 2 to 3 more rate increases—if incoming president Donald Trump implements a so-called ‘full-throttle’ strategy to jack up the American economy.
Some economists think the tax cuts and increased spending plans put forward by the Trump team may trigger higher inflation and force the Central Bank to raise rates more aggressively. Others think the Fed may be able to accommodate some stimulus without reacting sharply, said observers of the Fed’s action.
Fed officials did not give many hints in their latest forecast for the economy. They still expect GDP growth to average 2 percent over the next three years, and inflation to be moderate, although the Trump team forecasts 4 percent growth for years to come with their spending plans. The Fed also predicts unemployment will stay close to the 4.6 percent rate seen in November, which would make those growth targets impossible to meet if he sends the 11 million undocumented workers home, as he promised.
But President-Elect Trump has to know that, so he won’t be ejecting all those ‘illegals.’ It’s another con, the same ploy he used with his refusal to retract the Obama birther charge for six years. It brought those white and racist male (and female) voters to his side, which he calculated would outnumber the hostile Hispanic vote.
In fact, inflation is already picking up, even though at the consumer level it remains low. The Consumer Price Index that measures retail prices rose just 0.2 percent in November with the year-on-year rate up 1 tenth to plus 1.7 percent. The core rate, which excludes food and energy, also rose 0.2 percent with its year-on-year unchanged at 2.1 percent, and now at the Fed’s inflation target.
However, this is not enough inflation to generate additional growth. Inflation levels in the Clinton and GW Bush administrations were in the 3 to 4 percent range before 4 percent GDP growth kicked in.
And the Trump economic team must also know higher inflation will come with higher growth projections, since they want to finance much of the stimulus with additional borrowing without raising taxes to support that debt, as the GW Bush administration did to finance its spending for the invasion and occupation of Iraq and Afghanistan.
So Wall Street Economist Greg Ip believes the Trump team’s plans will cause pain. “Donald Trump’s tax cuts would result in $6 trillion in lost revenue over the next decade, according to several independent analyses. His advisers disagree. They claim Mr. Trump’s entire program, including trade, regulation and energy, not just taxes, would generate so much growth there would be almost no increase in the deficit.
But their math doesn’t add up, says Ip. “It rests on aggressive, tenuous or flawed assumptions: that deficits caused by tax cuts don’t raise interest rates; that removing regulations adds directly to gross domestic product; that oil and gas companies will rush to drill on newly opened federal land regardless of energy prices; and that protectionism expands the economy even if U.S. companies and workers are already working flat out.”
We therefore should assume higher inflation will come with more stimulus spending, but that’s not always a bad thing if it creates enough new jobs in an economy already near full employment. But it also means the Fed may keep its promise to raise interest rates further next year.
Harlan Green © 2016
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