Monday, December 12, 2016

How Donald Trump's economic plans will lead the Fed to reverse course on policy


Long-time Federal Reserve policy critic Peter Schiff has a new target, and it's none other than President-elect Donald Trump.

In a recent interview with CNBC's "Futures Now," the Euro Pacific Capital chief said that while themarkets have rallied since Trump's election victory, the very same economic issues that got him elected will be the exact same one's he'll find himself unable to solve.

As Schiff sees it, Trump pleased voters with his promise to cut taxes and increase spending in some key areas. However, his proposed policies will hurt the economy rather than make room for improvement.

"He doesn't want to tackle, for political reasons, the real problems that are underlying the economy," Schiff told CNBC.

Namely, the fund manager predicted that Trump's economic policies will exacerbate already-existing trade and fiscal deficits, and bring about inflation that the Fed will likely be pressured to solve. This may even involve going against the idea of a rate hike, which many had pegged at a more than 90 percent chance of occurring in December.

One of Trump's signature plans involves massive public spending on roads, bridges and other U.S. infrastructure. Meanwhile, economists nearly unanimously expect a tax cut that could rival the ones signed by former president George W. Bush.

"We're going to have to do even more quantitative easing (QE)," said Schiff, explaining that the central bank will have to return to its most potent weapon: Super-easy liquidity to pump-prime the economy.

"The Fed is going to have to reverse and cut interest rates, and it's not going to create economic growth, but it is going to put pressure on inflation that is already now above what the Fed supposedly says is its supposed target," he added.

In other words, Schiff believes that even if a December rate hike does happen, it's already "too little, too late" for the economy.

According to him, the Fed will still be faced with the question of how to finance the deficits that Schiff says will emerge, especially in light of the global bond rout that took place after the election.

The combination of outcomes from Trump's policies leads him to believe that a market "crisis" is on the way, and the crash could be even bigger than the one in 2008.

Stocks continued their post-election rally, with the Dow and small-cap stocks setting new record highs last week.

- Source CNBC

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