With reference to the piece by Sam Fleming and colleagues, entitled “Trade war threat pushes central banks apart” (Report, February 7), the concern the article raises — that the Federal Reserve is increasingly isolated in resisting rate cuts — reflects the Fed’s mission to see to it that relative changes in prices do not become entrenched in the economy.
The concern of Fed officials that President Donald Trump’s policies on tariffs and immigration will stoke inflation is not necessarily warranted. Neither is your concern about the potentially inflationary effect of tax cuts, reflected in the quote from John Llewellyn, a partner at Independent Economics, a consultancy, that “everything President Trump says he’s going to do is inflationary — certainly tariffs, certainly tax cuts”.
One-off price changes are clearly manageable by an economy whose “openness index” is only about 25 per cent of GDP according to the World Bank’s collection of development indicators. This is far lower than the global average of about 58 per cent, and this does not call for the Fed to intervene, as long as there are no secondary or derivative effects of the first-order impact.
As regards the inflationary impact of tax cuts this policy cannot be viewed in isolation, but has to be seen in the context of the overall budget.
Spending cuts financed by immediate reductions in unproductive government spending as espoused by Trump’s Department of Government Efficiency (Doge) that reduce the budget deficit, can raise output. This happens by boosting demand via increasing disposable income, which encourages businesses to hire workers and invest more.
Such effects are compounded by the disinflationary impact of deregulation that Trump is hell-bent on achieving.
Michael G Mimicopoulos
Former Senior Economist, United Nations
New York, NY, US