Trump's dilemma: slower job growth or
rising rates and inflation?
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[December 03, 2016]
By Howard Schneider
WASHINGTON (Reuters) - A drop in the U.S.
unemployment rate last month to a 9-year low signals the risk of a
collision between President-elect Donald Trump's plans to goose the
economy and the Federal Reserve's efforts to tap the brakes with higher
Since Trump's election, officials at the U.S. central bank have
cautiously introduced the possibility that his spending and tax cut
plans could prompt a faster pace of rate increases than the two hikes
currently foreseen in 2017.
An increase is already expected when the Fed meets in two weeks. Fresh
economic projections, the first since the election, will also be issued
and Fed Chair Janet Yellen will hold a news conference when the meeting
concludes on Dec. 14.
With November's decline, the jobless rate is now already below the most
optimistic projections from Fed policymakers for where it would stand at
If it keeps moving lower, Trump's spending and tax cut plans may be
adding fuel to a tank that's already brimming. Possible new trade or
immigration restrictions could make markets even tighter, and switch the
Fed from worrying about the risk of deflation to fighting price rises
before they get out of hand.
"There is much more than the Trump election driving the ... rally that
started the day after the election," Bank of the West chief economist
Scott Anderson wrote. "We are seeing signs of a synchronized rebound in
the global economy."
When Fed policymakers issued their last projections in September, the
lowest level predicted for the unemployment rate at the end of the year
was 4.7 percent. In November, it fell three-tenths of a percentage point
to 4.6 percent.
The decline was partly due to a drop in the labor force participation
rate, which officials have expected to begin falling again because of an
aging population with more retirees. In general, the lower the
unemployment rate, the slower the pace of job growth the economy can
sustain without pushing up wages and prices too quickly.
Policymakers insist they still have time to move rates higher to keep
price increases under control. Several officials feel it may even help
fix some of the damage from the 2007-2009 recession if inflation moved
above the Fed's 2 percent target for a while. That might, for example,
allow steady wage increases to restore some of the ground lost by
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President-elect Donald Trump speaks at a rally in Cincinnati, Ohio,
December 1, 2016 as part of "USA Thank You Tour 2016".
However, in recent months even ostensibly dovish officials, like
Boston Fed President Eric Rosengren, have cautioned that steady rate
hikes might be needed to avoid the need for even faster increases
that could trigger a recession.
"I view a small step up in interest rates as appropriate, not
because I want to curtail the expansion, but because I believe it
will help prolong the expansion," Cleveland Federal Reserve Bank
President Loretta Mester said on Wednesday..
Trump's victory gives that debate more urgency. His plans for a big
infrastructure spending package, tax cuts and tighter controls on
immigration could test the limits of what the economy can absorb
For a year now, Fed officials have said they expect job growth to
slow as the economy nears full employment. It hasn't happened,
meaning Trump will take office at what may be a tough point of
inflection: either job creation slows or inflation jumps.
Jed Kolko, chief economist at the Indeed job site, said the current
pace of job growth and low unemployment rate "sets a baseline for
the Trump administration."
"Recent wage gains and unemployment declines make this a tough
economy to improve on," he said.
(Reporting by Howard Schneider; Editing by Tim Ahmann and Andrea
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