The Fed Is on a Collision Course
Is the Trump economic boom a mirage? The data say yes, but the Fed models say no. The Fed has a long track record of sticking to its model-based approach and missing major turns in the U.S. economy.
Current Fed policy will push the U.S. economy to the brink of recession later this year. When that happens, the Fed will have to reverse course and ease monetary policy. This will send the dollar crashing while gold and the euro soar.
At first, the claim that the Trump economic boom is nothing special seems contrary to the happy-talk headlines coming from CNBC, Fox Business, Bloomberg and other mainstream business media outlets.
Those economic cheerleaders recite the stimulative effects of the Trump tax cuts and point to the Atlanta Fed forecast that second-quarter GDP will be 3.9% (as of the July 11 update).
The Atlanta Fed estimate of 3.9% is in line with forecasts from National Economic Council head Larry Kudlow, Art Laffer (proponent of the eponymous Laffer curve), Steve Moore and others that say Trump’s programs will produce persistent trend growth of 3–4% or higher.
Such growth would break decisively with the weak growth of the Obama years. It would also make the U.S. debt burden, currently at 105% of GDP, more sustainable if GDP were to grow faster than the national debt.
There’s one problem with the happy talk about 3–4% growth. We’ve seen this movie before.
In 2009, almost every economic forecaster and commentator was talking about “green shoots.” In 2010, then-Secretary of the Treasury Tim Geithner forecast the “recovery summer.” In 2017, the global monetary elites were praising the arrival (at last) of “synchronized global growth.”
None of this wishful thinking panned out. The green shoots turned brown, the recovery summer never came and the synchronized global growth was over almost as soon as it began.
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