Ex-President's Economic Views Seem Familiar
Former President has been known for his outspoken criticism of his successor's handling of the economy, blaming him for triggering an inflation crisis. However, recent economic strategies suggested by the ex-President bear a striking resemblance to those of his successor.
When the new administration commenced, the country was grappling with high unemployment rates. Despite this, the economy was on a recovery trajectory, rebounding quickly from the pandemic's effects. A nearly $2 trillion relief package, including $1,400 direct checks to citizens, was approved by the ruling party and the Congress. This was just a year after the previous President had signed a similar relief bill, and the Federal Reserve had slashed interest rates to zero to foster growth.
The ruling party largely overlooked warnings that such a massive stimulus might cause prices to skyrocket. And indeed, those predictions came true as inflation hit a four-decade high.
Economic Similarities and Differences
The ex-President now faces a very different economic landscape. The cost of living has become the top concern, and interest rates are significantly higher. However, some similarities can be observed between the early stages of the current and previous administrations, such as a struggling job market coupled with strong overall economic growth. Official data revealed that the country's gross domestic product grew at an impressive 4.3% annualized rate last summer, the fastest in two years.
This might make the former President reconsider his proposal to stimulate the robust economy with a relief package, including $2,000 checks, alongside his latest advocacy for low interest rates. These measures are strikingly similar to those that he and other critics argue led to the inflation crisis.
The Ex-President's Rule
Recently, the ex-President shared a comprehensive message on social media that he called "The Rule." He expressed a desire for his soon-to-be-nominated Federal Reserve Chairman to reduce interest rates to keep the stock market and economy thriving, even if it risks stoking inflation.
He asserted that a robust stock market could potentially accelerate economic growth by up to 20% a year. While that's an exaggeration - the country's economy has never grown by even 9% in a single year - it does underline a crucial point. The stock market doesn't directly contribute much to economic growth, but it does reflect investors' predictions about the economy's future direction.
Generally speaking, the former President is right: The Federal Reserve usually increases rates when the economy is overheating and lowers them when it is slowing down. Doing the contrary - cutting rates when the economy is growing fast - could potentially amplify economic growth. However, one of the side effects of a too-hot economy is inflation, which is why the Federal Reserve generally doesn't operate in the way the ex-President suggests.
Basic Economics
The fundamental laws of supply and demand explain why the ex-President's economic proposals could potentially be inflationary: Distributing $2,000 checks would stimulate demand without contributing to supply.
As basic economics will tell you, when people have more disposable income, they tend to spend it. If suppliers don't adapt to the increased demand, that could create a shortage of certain items, increasing their value and leading to higher prices for consumers.
Appointing a Federal Reserve chairman who supports lower rates could also push inflation higher if the rate-setting committee follows the new chairman's guidance. Lower interest rates can decrease businesses' borrowing costs, providing companies with more capital to spend. Like consumers, corporations can also trigger a supply/demand imbalance, which could lead to price increases.
The Federal Reserve was widely criticized for keeping rates low for too long, responding late to the inflation crisis. The current Chairman had initially called inflation "transitory," implying that it didn't require an immediate response from the Federal Reserve, a decision he later admitted was a mistake.
Now, the ex-President is advocating for a repeat of the current administration's approach: low rates, strong growth, and extra cash in citizens' pockets.
Impending Challenges
However, the ex-President has introduced a complicating factor that his successor didn't have to deal with: historic tariffs that are keeping prices high.
The tariffs have not caused runaway inflation, as economists had warned earlier. However, the Chairman stated this month that the tariffs alone are responsible for inflation that has remained above the Federal Reserve’s 2% long-term target. Consumer prices rose 2.7% over the past 12 months.
The ex-President acknowledged that lower rates and stimulus might cause a problem down the line. He stated that if inflation becomes worrisome due to the policies he's advocating, the Federal Reserve can raise rates "at the appropriate time."
However, he insists that time isn't now. In the meantime, he believes the Federal Reserve should push for more growth.
“The United States should be rewarded for SUCCESS, not brought down by it,” the ex-President wrote. “Anybody that disagrees with me will never be the Federal Reserve Chairman!”
In the end, the ex-President might get what he wants. It's widely anticipated that the Federal Reserve will maintain steady rates until mid-2026 to support a struggling labor market. However, if the job market continues to deteriorate, the Federal Reserve may have no choice but to cut rates, even if it risks higher prices.