Investors this yr have grown increasingly confident the US economy will achieve a “soft landing.”
But the election of Donald Trump because the nation’s next president has complicated the outlook.
And a few economists now think it’s likely the US could face one other inflation resurgence if Trump follows through together with his key campaign guarantees.
“We’re within the soft landing,” Nobel prize-winning economist and Columbia University professor Joseph Stiglitz said at Yahoo Finance’s annual Invest conference on Tuesday. “But that ends Jan. 20.”
Trump and his proposed policies have been viewed as potentially more inflationary resulting from the president-elect’s campaign guarantees of high tariffs on imported goods, tax cuts for firms, and curbs on immigration. Those policies could also pressure an already bloated federal deficit, further complicating the Federal Reserve’s path forward for rates of interest.
“The most important risk is a big across-the-board tariff, which might likely hit growth hard,” Jan Hatzius, chief economist at Goldman Sachs, wrote in a note to clients on Thursday.
Jennifer McKeown, chief global economist at Capital Economics, also acknowledged in a note this week there are “upside risks” to inflation “stemming partly from Trump’s proposed tariff and immigration policies.”
And investors have taken notice.
On Wednesday, the newest Global Fund Manager Survey from Bank of America highlighted increased expectations of a “no landing” scenario, by which the economy continues to grow but inflation pressures persist, resulting in a higher-for-longer rate of interest policy from the central bank.
Tariffs have been probably the most talked-about guarantees of Trump’s campaign. The president-elect has pledged to impose blanket tariffs of at the least 10% on all trading partners, including a 60% tariff on Chinese imports.
“It’ll be inflationary,” Stiglitz said. “And then you definately start considering of the inflationary spiral. The costs go up. Staff will want more wages. And then you definately start considering of what happens if others retaliate [with their own duties.]”
Minneapolis Fed president Neel Kashkari categorized a possible retaliation as a “tit-for-tat” trade war, which might keep inflation elevated over the long run.
“If inflation goes up, [Federal Reserve Chair Jerome Powell] goes to boost rates of interest,” Stiglitz said.
“You mix the upper rates of interest and the retaliation from other countries, you are going to get a world slowdown. Then you could have the worst of all possible worlds: inflation and stagnation, or slow growth.”
