Former Federal Reserve Chairman Ben Bernanke said on Saturday that the economic policies that Trump will put in place won’t cause a big change in inflation.
Bernanke said, “I agree that Trump policies, whatever their merits on public finance grounds, probably will have modest effects on the inflation rate.” He said this during a panel talk about the future of inflation at the American Economics Association meeting in San Francisco.
Bernanke said that Trump’s promised tax cuts for 2017 are already pretty much in place.
He said that changes in immigration are slow and unclear, and they won’t have a big impact on the economy as a whole.
But he said that a crackdown on immigration along with tariffs on imports could cause problems in some fields, like building and farming.
Tariff policy is hard to predict because it’s not clear if President Trump will only use them to negotiate or if he wants to keep them in place forever. Plus there are doubts about how big they will be,
He said that because import taxes lower output and raise inflation, it will not be clear what the Fed will do.
Bernanke said, “Unless something very strange happens, like geopolitical risks, it doesn’t seem like it will really change the path of inflation radically.”
The Federal Reserve’s plans are now heavily influenced by what they think Trump will do.
At their policy meeting last month, the Federal Reserve said they only saw two quarter-point interest rate cuts this year, which is half of what they had said in September. This caused some volatility in the stock and bond markets.
One of the top economists in the U.S., Tim Duy, told SGH Macro Advisors that the U.S. central bank will not change monetary policy until it is clearer how Trump’s economic plans will affect the economy.
Christina Romer, a former top economist in the Obama administration, agreed with the other panelists. She said that continuing the tax cuts, putting new tariffs on imports, and limiting immigration would all raise prices “at least a little.”
Romer said that inflation “seems somewhat stuck” at 2.5% per year, which is higher than the Fed’s goal of 2%.
Romer said, “It always seems like it might be a little too high.”
Harvard economist Jason Furman agreed that the Trump policies will have a relatively small effect on inflation of around 3 or 4 tenths of a percentage point.
The Fed could, however, find itself in a world where inflation is running at a 2.9% annual rate. Furman pointed out that those extra tenths could make the difference between the Fed raising rates, keeping them the same, or lowering them.
“Anything Trump does to weaken the independence of the Fed is the thing to be worried about,” Romer said. This would cause inflation to rise sharply.
Fed communication isn’t just about telling the bond market about the Fed’s policy plans anymore, Bernanke said. It also needs to try to get support for the policy from Congress and the public.
Bernanke said, “They have to explain why they are doing what they are doing and also explain why ending their independence would be a very bad thing for them because of how it would affect markets and inflation.”
The former head of the Fed said he thought inflation would ease up in the coming months.
“I personally think we have not yet seen unwinding of all supply shock factors,” Bernanke said. “These include rents and things that look backwards, like auto insurance.” “So I am hopeful for some improvement of inflation going forward without significant economic cost,” he added.
“I think that’s true.”
