Investors this year became more and more confident the American economy will experience a “soft landing”.
But the election of Donald Trump because the country’s next president has complicated the outlook.
And some economists now think it is likely that the United States will face a new resurgence of inflation if Trump keeps his main campaign promises.
“We are in for a soft landing,” said Joseph Stiglitz, a Nobel laureate economist and professor at Columbia University. Yahoo Finance Annual Invest Conference Tuesday. “But it ends on January 20.”
Trump and his policy proposals have been seen as potentially more inflationary due to the president-elect’s campaign promises of high tariffs on imported goods, corporate tax cuts, and corporate tax cuts. curb immigration. These policies could also put pressure on an already bloated federal deficit, further complicating the Federal Reserve’s interest rate policy.
“The biggest risk lies in the imposition of large and widespread tariffs, which would likely hit growth hard,” Jan Hatziuschief economist at Goldman Sachs, wrote in a note to clients Thursday.
Jennifer McKeown, chief global economist at Capital Economics, also acknowledged in a note this week that there are “upside risks” to inflation “arising in part from Trump’s proposed tariff and immigration policies.”
And investors have noticed.
The latest survey of global fund managers from Bank of America on Wednesday highlighted heightened expectations for “no landing” scenario, in which the economy continues to grow but inflationary pressures persist, leading to higher and longer interest rate policy by the central bank.
The prices were one of the most talked about Trump campaign promises. The president-elect has pledged to impose across-the-board tariffs of at least 10% on all trading partners, including 60% tariffs on Chinese imports.
“It will be inflationary,” Stiglitz said. “And then you start to think about the inflationary spiral. Prices rise. Workers will want more wages. And then you start to think about what will happen if others fight back (with their own duties.)”
Minneapolis Fed President Neel Kashkari called possible retaliation like a “tit for tat” trade warwhich would keep inflation high in the long term.
“If inflation rises, (Federal Reserve Chairman Jerome Powell) is going to raise interest rates,” Stiglitz said.
“If you combine higher interest rates and retaliation from other countries, you’ll get a global slowdown. Then you’ll end up in the worst of all possible worlds: inflation and stagnation, or slow growth .”
