(Bloomberg) -- President-elect Donald Trump’s policies on tariffs, fiscal stimulation and immigration will likely push the US toward missing its 2% inflation target, Bridgewater Associates Co-Chief Investment Officer Bob Prince said on Wednesday.
Should US inflation move closer to 3% in about one a half years from now, Trump may be inclined to nominate a Federal Reserve chairman who would accommodate the higher target and free him to cut interest rates, he said at Hong Kong’s third annual Global Financial Leaders’ Investment Summit.
“There is a desire for cutting interest rates,” he added. “But if the inflation rate holds up, then that can preclude cutting rates, which I think sets up an interesting situation 18 months from now” when current Chair Jerome Powell’s term expires.
Prince is joining peers who have warned investors to brace for higher inflation under a second Trump presidency, with its promises of pro-business and pro-growth policies adding pressure on prices and constraining labor force expansion.
“Investors should still consider putting their money in the assets with strong inflation protection,” John Studzinski, vice chairman and managing director of Pacific Investment Management Co., said separately at the Forbes CEO Conference in Bangkok.
“Inflation won’t go away, while proposed tariffs by the US will affect the prices. Geopolitical risk in the Middle East is also the main risk for supply chain and logistical costs,” Studzinski said.
Trump has criticized Powell, who has said that he wouldn’t leave his post if asked to resign by Trump. Powell said in a briefing earlier this month that any attempt to demote him or any other Fed governor in a leadership position was “not permitted under the law.”
The Fed chair has said the recent performance of the US economy has been “remarkably good” and has not sent any signals that policymakers should be in a hurry to lower rates.
Monetary policy could face headwinds next year if Trump fulfills his campaign promises to cut taxes, restrain immigration and deploy tariffs.
Trump’s policies would likely create an economic scenario of higher nominal growth, with spending staying higher and the yield curve trending steeper, Prince said. Household balance sheets are in “pretty good shape,” helped by prior decades of deleveraging, he said, adding that solid wages mean the spending has been largely financed by income, not credit.
Combining that with fiscal stimulation, investors may not get the real interest rate cuts they were looking for before. That environment is more favorable for equities, as companies with pricing power can turn that nominal spending into nominal earnings growth, Prince said.
The challenge in the equity market is that investors have not only priced in the best decade for corporate earnings in the past 10 years, but have fully factored in the probability of it happening again, Prince added.
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