As the Trump administration settles in for it’s second term in office it is likely that the United States’ macroeconomic policies are going to experience significant changes. This is largely due to Trump’s nomination for Secretary of the Treasury Scott Bessent. However, it is important to note that the Trump administration might not be able to fully carry out these policy plans due to economic, political, and global challenges.
One of Mr Bessent’s major goals is to achieve a mix of policy that will boost economic growth while stabilising the US Government’s inflated debt-to-GDP ratio. It is Mr Bessent’s belief that strong economic growth is a better remedy than fiscal austerity to begin tackling inflation and government debt.
To do this the plan is to decrease government borrowing costs to a level below GDP growth. If interest rates are above the nominal GDP growth rate, governments require a primary surplus i.e. government revenue exceeds government spending) to stabilise the debt-to-GDP ratio. As it stands the US is running a primary deficit of 3.6% of GDP, therefore, to stabilise the trajectory of public debt fiscal policy will have to tightened by 3.6%, as shown in figure 1.
Figure 1
Simply put the government would be able to stabilise the government’s debt-to-GDP ratio if interest rates were lowered below nominal GDP growth. While this would make life easier for the Administration, the Federal Reserve decides on the path of interest rates through monetary policy and is independent of Washington’s policies.
If the Fed were to reduce interest rates significantly it could possibly backfire on the Trump Administration. Trump’s current political agenda is to stop the surge of illegal immigration in the US, cut taxes and impose tariffs on goods imported into the US. All of these measures have the capacity to be inflationary. This coupled with aggressive rate cuts, also inflationary, could see the Fed lose its handle on inflation. This outcome is unlikely to be favoured by either Trump or the Fed. It is therefore unlikely that the Fed will cut rates in a manner that could stabilise the current path of public debt in the US.
A smoother path to achieve Trump’s goals can be achieved by Mr Bessent cementing three macroeconomic policy pillars:
- Using USD depreciation instead of import tariffs to make US manufacturing globally competitive. Markets are never fans of tariffs and business sentiment will be higher if a controlled period of USD depreciation is used to make the US an attractive destination for manufacturing.
- Use a reduction in fiscal spending as a tool to bring down inflation. This, along with increased economic growth from tax cuts and deregulation will offset the inflationary worries that have arisen.
- Figure 2 shows that oil is a major driver of inflation, and conversely, disinflation. The Administration can implement fiscal policy moves to boost the supply of oil. This will, in turn, drop crude oil prices and ease the inflationary pressures associated by the market with Trump’s desired tax cuts and tariffs.
Figure 2
In conclusion, while Scott Bessent’s potential macroeconomic agenda offers a strategic approach to boosting economic growth and stabilizing debt, real-world challenges such as inflationary pressures, Federal Reserve policies and global economic constraints may limit its full implementation. Achieving these goals will require careful balancing of fiscal, monetary and trade policies to ensure sustainable progress without unintended economic consequences.
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