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Trump Has Tightrope To Walk On Growth-Inflation Mix
Whatever the models say and irrespective of the long run dot (which has at least moved up), neutral's significantly higher in the post-pandemic world.
I've been on (and on and on) about the absurdity of r-star as a concept. I've "done my time" on that beat, so to speak. Allow me, if you will, to recycle some language from the March 9, 2024, Weekly, in which I found my muse on this particular subject.
"As a practical consideration, the neutral rate's pretty useless," I wrote, adding that,
The
I think most analysts have this wrong. Stagnation followed by a recession seems more likely. Fiscal policy won’t be that stimulative. The trump tax cuts from 2017 will be extended. But that’s on the books already.Direct government spending will slow down. Tariffs will reduce consumption and add friction to the economy. And trade retaliation seems to be a done deal. Europe and China are already fashioning their lists. Consumption taxes hit lower income quartiles.Most of the tax cuts will benefit higher earners or corps who save more. Confidence will be lower once the clown show takes office. The picture is a lot murkier than most expect.
It also seems as if Elon Musk’s promise of a “cold winter” as the federal government is slashed are being shrugged off, eh? But what does he know?
“Stagnation followed by a recession seems more likely.”
Yeah, I actually agree with RIA here. This is a clown show administration inheriting a late-cycle economy following the most aggressive rate-hiking cycle in a generation and the longest 2s10s inversion on record. That’s pretty ominous.
I’m starting to lean in this direction as well. The narrow margin in the House will likely limit the impact of any tax cuts and they’ll end up going to the wealthy much as the prior tax cuts did. Any stimulative effect will likely be blunted from the repeal of Inflation Reduction Act spending.
Any major cuts to government employment will take time, but could have an impact on overall employment if Musk gets his way. Any mass deportations will also take time and resources to complete, and I wouldn’t be surprised if business/agriculture interests get Trump to back off with much smaller deportations that he’ll use for photo ops and declare victory.
Note that Kristi Noem will (presumably) be running Homeland Security, the agency from which we’ll all get our numbers about deportations. Trust is a fickle thing…