Federal Reserve officials cautioned on Thursday that the fiscal and tax plans sketched out by the incoming Trump administration could trade a short-term economic boost for longer-run inflation and debt problems they might have to counteract.
Fed regional bank presidents, in an array of appearances, agreed in principle that the policies President-elect Donald Trump is likely to pursue will increase economic growth - through direct spending, the consumption and investment spurred by tax cuts, and the boost to business from lighter regulation.
In a recent survey of businesses in the southeast, said Atlanta Federal Reserve President Dennis Lockhart, executives expressed "optimism around the prospect of fiscal stimulus, tax reduction, spending on infrastructure and some amount of deregulation."
But at this point the economy does not really need much short-term help, said Chicago Federal Reserve President Charles Evans, speaking to the American Council of Life Insurers. It needs longer term strategies to expand a labor force constrained by issues like population aging and lagging productivity.
The new administration is taking over "at a time of arguably full employment," Evans said. "The U.S. economy could experience a burst of four percent growth for a year or two or more...But unless this is accompanied by sustainable structural improvement in labor and productivity growth, such GDP growth would ... ultimately lead to more restrictive financial conditions."
Lockhart, who retires at the end of next month, said that if inflation moves too quickly the Fed may be forced into "preemptive" rate increases.
Philadelphia Federal Reserve Bank President Patrick Harker said while he had not yet changed his policy outlook based on anything Trump might do, as things stand "the economy is displaying considerable strength" without any extra government help. Fed Chair Janet Yellen said the U.S. economy was doing "quite well" and didn't face any serious obstacles in the short term.
St. Louis Federal Reserve President James Bullard downplayed any immediate inflation concerns during remarks in New York. He said the impact of the tax, spending and other changes Trump might enact would become clear perhaps next year.
Dallas Fed President Robert Kaplan, who also spoke on Thursday, said he was still in wait-and-see mode on the economic effect of many of Trump's policies. This included the repeal of Obamacare, which Kaplan suggested could hurt consumers' willingness to spend.
Reference: Reuters
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