Trump, Fed headed for clash amid US dollar surge, economists say

[FRANKFURT] Donald Trump and the US Federal Reserve are heading for a collision that will almost certainly result in a stronger US dollar, two leading economists said.

"I see a likelihood for a major clash developing in the next year, year and half, between the Trump administration's desire to go for 3 to 4 per cent growth and the growing attention of the Fed to emerging inflation in their own 2 per cent mandate," Northwestern University's Robert J Gordon told a conference in Paris on Monday.

Barry Eichengreen of the University of California Berkeley sees "double-digit" US dollar appreciation as a possible consequence of Mr Trump's fiscal stimulus, tax reform and protectionist trade policy.

The president elect's economic goals came into the spotlight at a Bank of France-organised conference on "secular stagnation" - the theory that advanced economies are headed for a long period of sluggish growth and stagnant productivity. The theory stands in contrast to Mr Trump's promise to jump-start US economic growth with a mix of infrastructure spending, tax cuts and repatriating jobs.

For Mr Gordon, Mr Trump's policies will lead to faster inflation in an economy that is already experiencing wage pressures and labour shortages, prompting the Federal Reserve to step up the pace of its rate hikes.

"It's almost certain that Trump will not reappoint Janet Yellen because, by the time that comes up a year from now, she will have already made him mad by raising interest rates," Mr Gordon said.

"The appreciation of the dollar that comes with the higher interest rates is going to cause an increase in the trade deficit and undermine his own desire to reduce the trade deficit. We're going to have major impediments to Trump's achieving his goals for growth."

The impact of these policies on the global economy may not be fully priced-in yet, according to Mr Eichengreen.

"There's a possibility we'll see a significantly stronger dollar, even relative to current levels, which are high," he said.

"And there's the danger that markets and the global financial system aren't prepared for the consequences."

BLOOMBERG