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Frustrated Trump May Double Down in Bid to Save Policies

Frustrated Trump May Double Down in Bid to Save Policies

By    |   Thursday, 16 February 2017 07:11 AM

Fed Chair Janet Yellen’s testimony before the House Financial Services Committee did not offer much new from her previous testimony on Tuesday.

The interesting point was that she said she believes the Fed is close to achieving its objectives of full employment and stable prices.

New York Fed President William Dudley touched from his side the issue of reversing quantitative policy saying: “To the extent that we do decide at some point in the future to taper or end reinvestments (of maturing bonds), that will also be a way of removing accommodation, so that will be a bit of a substitute for raising short term interest rates ... so ... that might actually stretch out the process of hiking rates.

That the Fed should tighten policy this year is obvious. The question is whether the Fed is behind the curve, or perhaps, how far the Fed is behind the curve and thus how much inflation can increase? The other question is, how the Fed should tighten policy?

Fed Vice Chair Fischer speaks today and as he been perceived as someone who is concerned about the Fed’s quantitative policy position, he hopefully enlightens us somewhat.

At the same we all witness the inevitable rise of the US consumer price inflation rate that now stands at 2.5 percent (CPI) and that has managed to surprise the financial markets, notwithstanding the upward trend was clearly in place. The same can be said for the PCE deflator, which the Fed follows.

Nevertheless, and this is of relevance to investors, the rise of the rate of inflation is only part of the story. This is not something that can be blamed on the oil price. The inflation rate of the last 2 years can be blamed on the oil price, but what we are witnessing now is a return to normal, or more accurately, above normal.

Most inflation measures, including those that exclude oil are running above their 20-year average today. This reflects the tightening labor market in the United States. The labor market is the principal driver of underlying inflation pressures.

Besides all that, today’s market euphoria seems convinced of the idea that all is for the best in this best of all possible worlds. It starts to look like a play of irrational exuberance and therefore it may be worth considering for a moment the political noise that is currently taking place in the United States.

President’s Trump view that the security services are out to get him, the departure of the national security advisor and questions over Trump’s nominee for the labor secretary are not of themselves especially relevant for financial markets, but, while these events are starting to show, however, is a degree of strain between Congress and the White House. A lack of cooperation here would limit parts of the President’s policy agenda, particularly around his planned fiscal policy.

Remember that President Carter’s administration was also marked by similar strains with a Congress that was notionally of the same party as the President.

If President Trump is frustrated over parts of his policy agenda, there is, perhaps, a risk that he may double down and pursue other policies more aggressively to compensate.

The areas where the president has considerable unilateral authority are trade and immigration and therefore his policies concerning these subjects matter quite a lot to financial markets, and thus to investors in the end.

So, there is a non-negligible chance that this best of all worlds won’t continue the way it does at present. Watch out!

Finally, French unemployment fell to 10 percent at the end of 2016, which is not a good number, and that will have undoubtedly some political resonance given the upcoming French general election at the end of April and the first week of May.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.


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If President Trump is frustrated over parts of his policy agenda, there is, perhaps, a risk that he may double down and pursue other policies more aggressively to compensate.
trump, policy, economy inflation
Thursday, 16 February 2017 07:11 AM
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