Everything is ready for President-elect Trump and the Republican led Congress to take the reins of this economy. The environment for pro-growth economic policies couldn’t be any better. The Fed Fund rate (short term interest rate) is near zero and the inflation rate has still not reached the Fed’s target of 2%. This is a much better situation than it was in 1980.

The economy wasn’t doing well when Ronald Reagan took office in 1981. The Federal Reserve raised the Fed Fund rate to a whopping 20% (today it’s 0.25%) as they tried to curtail the high 12.5% inflation rate (today it’s 1.6%). The country was also experiencing high unemployment. Reagan’s task was to grow the economy in that volatile environment to create jobs.

The new Trump administration has an economic agenda for the US economy to create jobs as well, but in a much less volatile environment. Our economy today is like someone through a wet blanket over it.

Donald Trump's plan for growth includes rolling back job killing regulations and cutting personal and corporate taxes. This will put more money into consumers’ pockets to cycle into our economy and it will free up businesses to expand and hire more people. 

Trump also plans to create the incentive for big business to bring home the two trillion in foreign profits sitting offshore. Couple that with his plan to increase infrastructure and defense spending and we’ll see huge investment spending within the United States.

All this economic activity will increase the demand for products and services, which will lead to higher inflation. If we have strong economic growth, then inflation could rise sharply and too fast. 

Fed Funds Rate

In December 2008, the Federal Reserve lowered short term interest rates to 0% and has only raised the Fed fund rate 1/4 point since, in December 2015. The Fed has kept rates low to not impede the economic recovery and because the inflation rate has not reached their 2% target level.

The Fed would like to raise short term rates because it would give the central bank their bullets back. They want to have the ability to lower rates again in a future recession to stimulate borrowing to increase economic activity. They don’t have many options right now if things go south.

Higher interest rates will benefit savers too. Today, there is very little interest paid to people who have savings. Their deposit accounts are not keeping up with inflation, even as weak as inflation has been. A higher Fed rate will make retirees happy and it will encourage more savings by the American people.

A Better Environment

There’s some that have raised concerns over Donald Trump’s high growth economic plan because of their fear of inflation, but a fear of inflation with a 1/4 point Fed rate is not warranted. This low Fed rate environment may be the perfect opportunity for Trump and the Republicans to take the wet blanket off our economy. It's time to fire things up.

The Fed will finally have the confidence to raise interest rates. They will raise rates as they try and temper strong economic growth to keep inflation in check. At least that will be their goal.

A growing economy and a higher Fed Fund rate will make the US dollar very strong. This will result in foreign capital investing heavily in the United States, even more so than today. Worldwide capital looking for high returns will further fuel US economic growth. 

If we see strong growth with Donald Trump’s policies, then the US should see a normalization of interest rates by the Federal Reserve. With these increasing interest rates we will then, hopefully, keep inflation in check at the same time. Perfect. 

Photo by Sam valadi


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