Trump policies will likely have ‘modest’ effect on inflation, Bernanke says

By Greg Robb

Fed must work to get Congressional and public support for its plans, former Fed chairman says

The economic policies outlined by the incoming Trump administration won’t cause a radical shift in inflation, former Federal Reserve Chairman Ben Bernanke said Saturday.

“I agree Trump policies, whatever their merits on public finance grounds, probably will be modest in terms of their effect on inflation rate,” Bernanke said, during a panel discussion on the inflation outlook at the American Economics Association meeting in San Francisco.

The 2017 tax cuts that Trump wants to extend are already pretty much in place, Bernanke said.

Changes in immigration is a slow and uncertain process and won’t have much effect on the aggregate economy, he said.

However, an immigration crackdown, combined with import tariffs, can create some problems in some specific industries like construction and agriculture, he said.

Tariff policy is very hard to forecast because it is uncertain whether President Trump will use them for bargaining purposes or will wants to keep them permanently. There are also questions about how big they will be,

Import tariffs both reduce output and raise inflation and so the Fed’s response will not be obvious, he noted.

“Barring some very unusual situation, including geopolitical risks, it doesn’t seem it is really going to shift the inflation path radically,” Bernanke said.

Assumptions about Trump’s policies have become a key factor for Federal Reserve policy.

See also: The Fed has two bad options in 2025: accept higher inflation or risk a recession

At the policy meeting last month, the Fed only projected two quarter-point interest rate cuts this year, half as many as they had forecast in September, resulting in some stock and bond market volatility.

Tim Duy, chief U.S. economist at SGH Macro Advisors said the U.S. central bank is determined to hold monetary policy steady until uncertainty over the impact of Trump’s economic plans abates.

On the same panel, former top Obama administration economist Christina Romer agreed, saying that extending the tax cuts, new import tariffs and curbs on immigration would push up inflation, “at least a small amount.”

Romer said inflation “seems somewhat stuck” at 2.5% annual rate, above the Fed’s 2% target.

“It is always threatening to be a little too high,” Romer said.

Harvard economist Jason Furman agreed that the Trump policies will have a relatively small impact on inflation of around 3 or 4 tenths of a percentage point.

But the Fed could find itself in a world where inflation is running at a 2.9% annual rate, and those additional tenths adding to the inflation rate could make the difference between the Fed raising rates, holding steady or easing, Furman noted.

Romer said any Trump move to diminish the independence of the Fed “is the thing to be worried about” and would result in a spike in inflation.

Bernanke said Fed communication is no longer just about explaining its policy plans to the bond market but also must aim at winning over Congressional and public support for the policy.

“They have to explain why they are doing what they’re doing and also explaining losing independence would be a very bad thing from their perspective because of the effect it would have on inflation and markets,” Bernanke said.

The former Fed chair said he thought inflation pressures would soften in coming months.

“My personal opinion is we have not yet seen unwinding of all supply shock factors, like rents and backward-looking things like auto insurance, and so I am hopeful for some improvement of inflation going forward without significant economic cost,” Bernanke said.

“That’s my best guess.”

-Greg Robb

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