The Trump economic program seems to me to have had three prongs:

–promote sunset industries through domestic regulation and import restrictions, to satisfy wealthy Republican donors

–to prevent immigration from Asia, Latin America and Africa, and to expel immigrants already here, to appeal to white racist supporters, and

–to contest the rise of China’s economic power.

The first two depressed domestic economic growth all by themselves; the third (the only good idea of the three) did so through trade restrictions whose design was unfortunately on a par with injecting bleach to cure covid.

Trump countered the negative effects of this toxic stew by pressuring the Fed to run an extremely stimulative money policy. That it was indeed toxic can be seen by the steep underperformance of the US-centric Russell 2000 index from the start of 2018 on, as well as its rocket-ship rise from early last November.

This situation did have at least one important, unintended I think, consequence: very cheap money stimulated a lot of job growth, without the inflation economic theory predicted. Employers were compelled by the shrinking unemployment rate to widen their net from the usual suspects to include more minority workers and the chronically unemployed, and to establish better training programs for them. Since 1985, the US has done by far the least of any country in the OECD to help these groups, and, to my eyes, the paltry programs launched were unsuccessful. Here, on the other hand, was something that didn’t cost the government a lot–and actually worked.

My point?

I think both the Biden administration and the Fed have made this lucky accident an important part of their monetary policy planning. To my mind, most Fed statements allude to this. The implication is that rates will stay lower for longer than the consensus expects.

One could frame this hypothesis in another fashion. Years ago, when the runaway inflation from the late 1970s had been subdued and prices were rising at about a 3% annual rate, the Fed decided to continue to push inflation down to the 2% that theorists of the day posited would be the optimal result. What actually happened was that inflation fell below 2% and the best efforts of the Fed couldn’t get inflation to rise. This frightened economists, as it well should have, since less-than-2%-and-we-can’t-get-it-to-go-up-like-we-thought-we-could is very close to deflation and the visions of today’s Japan/1930s US this conjures up. Arguably, then, nipping incipient inflation in the bud is much less desirable than letting it run to, say, 3%–to get us away from scary minus numbers and, if nothing else, to demonstrate that it can be done. If not now, when?

Either way, my bet is that we’re not going to see the 10-year Treasury yield threatening to break above 1.75% due to Fed action. There’s always the possibility that newspaper reading- and finance talk show listening-AI will run amok, but I have no idea how to figure that into my calculations.