MNI INTERVIEW: Ex-Fed's Blinder Sees Stagflation Shock Ahead

MNI (WASHINGTON) - Incoming American President Donald Trump's trade and immigration policies will depress growth and increase inflation, forcing the Federal Reserve to keep interest rates higher over the medium term, former Fed vice chair Alan Blinder told MNI. 

An extension of tax cuts pushes in the other direction on growth but will also be inflationary, he said. The president-elect has promised 60% tariffs on China and 10%-20% tariffs on other trading partners, as well as draconian restrictions on immigration and mass deportations. He might be talked out of some of those ideas, but the "supine" Republican Party may also be content to defer to Trump's wishlist, Blinder said. 

"If you put it all together, it’s clearly a stagflationary shock. It’s less labor, it’s disruption of various sorts in various economic and production activities, and it’s inflationary for the reason that tariffs are always inflationary," he said in an interview.  

Even if tariffs only push up prices one time, having little net effect on inflation over a five to 10-year period, markets and the Fed will have to react, Blinder said. 

"It’s indubitably inflationary, although people are arguing over how much. The direction is clear, the magnitude is not clear, and the Fed knows both," he said. "When there’s some clarity, the Fed will start taking it seriously in its plans and actions." (See MNI INTERVIEW: Fed Pause Could Lead To Trump Clash-Ex-Nominee)

DECEMBER CUT A CLOSE CALL

Stronger-than-expected inflation data in recent weeks have already been "calling less loudly for rate cuts than before," Blinder said. 

The three-month trend in core CPI has risen to 3.6% annualized, three-tenths hotter than the October rate. Stubborn housing inflation and high inflation in certain categories could stall progress in getting inflation back to 2%, Fed Governor Adriana Kugler acknowledged last week. 

"The inflation decline has simmered down. In the eyes of some pessimists, even ended. I don’t think that," Blinder said. "The case for cutting has gotten weaker but hasn’t disappeared. My guess today is they will cut 25bp but it won’t be a clearly unanimous decision."

He estimates the December odds as marginally in favor of a third cut, with Chair Jerome Powell playing a strong role in persuading the rest of the committee. 

"I don’t think it’s a mystery which side of this debate he sits on," Blinder said. (See MNI INTERVIEW: Fed To Temper Pace Of Cuts In 2025 - Bullard)