Podcast Summary
Unexpected US election outcome causes market volatility and long-term interest rate surge: The US election led to market volatility but also a long-term interest rate surge, which was unexpected and exceeded the expectations of former Federal Reserve chairs
Principal Asset Management, through its 360-degree perspective, delivers local insights and global expertise to identify compelling investing opportunities across public and private equity and debt. In the financial markets, the unexpected outcome of the US election led to a market sell-off initially but a strong rebound since then. A more significant development has been the surge in long-term interest rates and inflation expectations, which have been long-awaited by many market observers. This shift could be attributed to the political upheaval caused by the election results, making it a stunning turn of events that surpassed even the expectations of former Federal Reserve chairs like Janet Yellen and Ben Bernanke.
Trump's presidency jolts financial markets more than Fed's monetary policies: Trump's win led to a significant increase in Treasury yields, indicating a shift in risk premiums and potentially a change in market sentiment, suggesting the Fed's efforts to hit a 2% inflation target are politically constrained.
The unexpected win of Donald Trump in the US presidency has jolted financial markets more than the Federal Reserve's monetary policies in the past few years. Trump's victory has led to a significant increase in Treasury yields, indicating a shift in risk premiums and potentially a change in market sentiment. This move suggests that the Federal Reserve's efforts to hit a 2% inflation target, including quantitative easing and forward guidance, have been politically constrained, as the public's perception and acceptance of these policies plays a crucial role in their success. David Beckworth, a research fellow at the Mercatus Center and author of the blog Macro and Other Market Musings, explained that the Fed's ability to achieve its goals is limited by the body politic. Trump's win may have provided the shock the market needed to break free from the optimism-pessimism swing that has persisted for years.
Public's shifting attitude towards inflation: People's expectations for stable prices have changed due to political shifts and dissatisfaction with the status quo, potentially leading to higher inflation under Trump's administration
The public's attitude towards inflation has shifted due to a combination of factors, including political changes and the perceived need for higher economic growth. The success of the Federal Reserve in maintaining low inflation over the past few decades created an expectation among the public for stable prices. However, after the financial crisis and years of sluggish growth, people became dissatisfied with the status quo and wanted something new. Trump's election can be seen as a reflection of this desire for change, with his proposals for increased investment spending and tax cuts suggesting a tolerance for higher inflation. The Fed's ability to control inflation is also influenced by political constraints, meaning that fiscal policy plays a significant role in shaping inflation expectations. Trump's victory speech, which emphasized infrastructure spending and tax cuts, further underscored this shift towards easier fiscal policy and potentially higher inflation.
Fiscal Policy's Impact on Inflation: Fiscal policy significantly influences inflation through the government's ability to run deficits and print money, impacting the Fed's control and solvency of the U.S. Treasury.
The relationship between fiscal policy and inflation is more interconnected than previously thought. The ongoing fiscal stimulus measures suggest that inflation could be influenced significantly by the fiscal side, rather than just being the responsibility of the Federal Reserve. This is supported by historical examples, such as Trump's statements about government's ability to print money and run deficits. Additionally, the Fed's ability to control inflation is dependent on the solvency of the U.S. Treasury. Therefore, changes in fiscal policy can ultimately shape expectations about inflation.
The role of fiscal policy in controlling inflation and demand: The debate around the impact of fiscal and monetary policies on inflation and demand continues, with some arguing that fiscal policy, particularly large spending plans, could be the main driver. Public tolerance for inflation and economic growth might play a significant role.
The role of the Federal Reserve in controlling inflation and total demand may have been overstated, and the fiscal policy, particularly large spending plans, could be the main driver. The discussion touched upon the concept of Ricardian equivalence, which suggests that people will spend less if they expect higher taxes in the future, counteracting any stimulative effects. However, it's important to note that the monetary policy offset, where the Fed's desire to maintain low inflation could limit the impact of fiscal policy, has been a conventional view. The public's tolerance level for inflation and economic growth might play a significant role in the effectiveness of fiscal and monetary policies. Trump's spending plans, implemented during low unemployment, could potentially test this assumption. In summary, the debate around the significance of fiscal and monetary policies in controlling inflation and total demand is ongoing, and the public's tolerance level for these policies might be a crucial factor.
Uncertainty in the relationship between the Fed and Trump's administration: Trump's criticism of the Fed and push for fiscal stimulus could lead to conflicting monetary and fiscal policies, with potential appointees like Judy Shelton adding complexity to the situation.
The relationship between the Fed and Trump's administration is uncertain and could potentially lead to conflicting monetary and fiscal policies. Trump's criticism of the Fed and his emphasis on fiscal policy suggest he may limit the Fed's aggressive unconventional policies while pushing for more fiscal stimulus. However, the appointment of advisors like Judy Shelton, who advocates for hard money views, adds complexity to the situation. Inflation trends in stable economies, such as Singapore and Switzerland, further complicate the issue as they exhibit low or negative inflation rates. Overall, the financial markets' reactions to these developments provide intriguing insights into the potential economic landscape under the Trump administration.
Political stability and low inflation are linked: Advanced economies with political stability have built expectations for low inflation, while countries with weaker political stability often experience high inflation. Inflation targeting in advanced economies limits their flexibility during economic downturns, but Trump's policies have given more degrees of freedom to macroeconomic policymakers.
Political stability and low inflation are closely linked. Advanced economies, like Japan, with aging populations and a history of inflation targeting, have built expectations for low inflation. Their populations, being a powerful voting block, won't tolerate high inflation that could negatively impact their fixed income. Conversely, countries with weaker political stability, such as South Africa, Brazil, Turkey, and Zimbabwe, often experience high inflation. The success of inflation targeting in advanced economies has created a straitjacket, limiting their flexibility during economic downturns. Donald Trump's policies, however, have given central banks and macroeconomic policymakers more degrees of freedom to maneuver, allowing them to respond effectively to economic challenges.
Macroeconomic Debate and Change under Trump Administration: Uncertainty surrounding Trump's economic policies leads to market speculation and potential impact on interest rates, inflation, and the economy.
The economic landscape is poised for significant debate and change, particularly in the context of the Trump administration's policies. The potential for increased infrastructure spending and a shift in economic direction has led to increased speculation in financial markets, as seen in the surge in industrial metal prices. However, the uncertainty surrounding the specifics of these policies and the willingness of politicians to follow through on their past stances adds a layer of complexity to the situation. As the situation unfolds, it will be important to monitor how these developments impact interest rates, inflation, and the broader economy. The Macro Musings podcast, hosted by David Beckwith, is a valuable resource for staying informed on these macroeconomic issues.
New Finance Podcast 'Money Stuff' Launches Every Friday: Listen to Money Stuff for Wall Street insights, follow Odd Lots and David Beckworth on Twitter, and check out CIT's commercial services and O'Reilly Variscan tool.
Matt Levine and Katie Greifeld are launching a new podcast called Money Stuff, based on Levine's popular finance newsletter. Listeners can tune in every Friday to gain insights into Wall Street finance and other related topics. The podcast is available on Apple Podcasts, Spotify, and other podcast platforms. Additionally, Jo Weisenthal and Tracy Alloway mentioned their own podcast, Odd Lots, and encouraged listeners to follow them and David Beckworth on Twitter. Lastly, they promoted CIT's commercial lending, leasing, and treasury management services for small and middle market businesses. Furthermore, they advertised O'Reilly Variscan, a free tool that helps diagnose check engine light issues.