Olivier Blanchard, former chief economist of the International Monetary Fund, said on Wednesday that the Trump administration's economic policies could lead to economic overheating and higher inflation, and would result in the Federal Reserve raising interest rates.
A recent survey by foreign media shows that most economists expect that due to the policies proposed by Trump potentially leading to higher inflation, the rate cut by the Federal Reserve in 2025 will be less than they expected a month ago.
Sustained strong economic growth, stubbornly high inflation, and record highs in the stock market have become obstacles to the Federal Reserve rapidly cutting interest rates. Fed Chairman Powell said last week, 'The economy has not signaled any need for us to rush to lower interest rates.'
Market pricing shows that the likelihood of a rate cut in December is now below 60%.
'The risk of conflict between the Trump administration and the Federal Reserve is very high,' Blanchard said during a discussion of a recent article hosted by the Peterson Institute for International Economics. Blanchard is a senior researcher at the institute and a former president of the American Economic Association.
Although the high inflation caused by the COVID-19 pandemic took the Federal Reserve by surprise, Blanchard successfully predicted this outcome, which made him famous.
Blanchard said that the three pillars of Trump's economic plan will all lead to higher inflation.
Tariffs on imported goods will lead to economic overheating and upward pressure on prices. The expulsion of illegal immigrants will result in labor shortages and rising wages, and tax cuts will also lead to economic overheating.
He stated: 'There are three reasons to believe that the Federal Reserve may see higher inflation. We do not know how severe inflation will be, but it is the Fed's responsibility to prevent this from happening.' He added that this would lead to rising interest rates and a stronger dollar, which is not what Trump wants.
Blanchard said, 'If the Federal Reserve does what it must do, it will hinder Trump from getting what he wants.'
Blanchard is very confident that Powell will 'steadfastly' adhere to the necessity of potential interest rate hikes before the end of his term in 2026.
He said he does not even believe that whoever ultimately succeeds Powell will be able to keep interest rates low in the face of rising inflation expectations. He added, 'Most people will stick to the Fed's mission of maintaining stability and low inflation.'
Article forwarded from: Jinshi Data
