×

The biggest obstacles to Trumponomics: Janet Yellen and the dollar

Donald Trump is inheriting an economy in pretty good shape with low unemployment, rising wages and a rocking stock market.

But the president-elect faces several potentially big obstacles to his plans to goose growth to closer to 5 percent and create tens of millions of new jobs.

The biggest immediate threats: Janet Yellen and the dollar.

The central bank chair this week moved to bump rates up by a quarter point and made it clear the Fed is prepared to move faster if Trump and the Republican Congress pump hundreds of billions of dollars into the economy through big tax cuts and infrastructure spending. And the dollar's relentless march higher, while carrying benefits for Americans looking to travel and buy foreign products, threatens U.S. exporters.

Janet Yellen
Samuel Corum | Anadolu Agency | Getty Images
Janet Yellen

Exports now make up around 13 percent of U.S. gross domestic product. U.S. multinationals will also find it more expensive to convert foreign earnings to dollars. Trump himself showed concern over both factors earlier this year. "If we raise interest rates and the dollar gets too strong, we're going to have some major problems," he said on CNBC in May.

Some analysts interpreted the Fed's actions and language this week as mostly dovish. Rates remain historically low, and moving to three expected hikes from two in 2017 was not exactly a shocking move to tighter fiscal policy. But during her press conference, Yellen was pretty clear that she does not see the need for big fiscal stimulus at this point in the economic cycle, with unemployment at 4.6 percent and inflation showing some signs of stirring.

"Some of the participants, but not all of the participants, did incorporate some assumption of a change in fiscal policy into their projections, and that may have been a factor that was one of several that occasioned the shifts," Yellen said in her news conference.

Later, she took on Trump's plans more directly, easing off on earlier pleas for Congress to inject more money into the economy to take the burden off the central bank.

"I believe my predecessor and I called for fiscal stimulus when the unemployment rate was substantially higher than it is now," she said. "So I would say at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment."

Seeming to realize she had strayed a little to close to telling the incoming president what to do, Yellen attempted a partial walk-back. "Let me be careful that I am not trying to provide advice to the new administration or to Congress as to what is the appropriate stance of policy."

Still, the message was fairly clear. If Trump and Congress flood the economy with cash, the Fed will likely act as a counter balance and pump the brakes. The result could be a happy balance of slightly higher rates and just enough inflation to keep wages and spending rising. Or it could be a disaster in which the Fed races to keep a lid on inflation, causing growth to stall, the dreaded stagflation scenario.

A strong dollar and higher rates are not Trump's only economic issues as he attempts to deliver on promises of greater prosperity for all Americans, especially Midwest manufacturing workers. The U.S. economy has significant structural problems, including stalled productivity growth and a shrunken labor force, that may prove highly resistant to tax and regulatory changes as a solution.

Economists mostly agree that big cuts in corporate and individual tax rates and elimination of regulations on energy and other sectors will produce at least a brief period of faster growth. They could even draw some workers who left the labor force after the Great Recession back into the economy. But manufacturing automation remains an obstacle to Trump's hopes of a renaissance in high-paying blue collar jobs. And even some Trump loyalists acknowledge that moving the U.S. out of the "new normal" of slow growth and modest productivity gains will be extremely difficult.

"I think if you do this thing right, particularly the business tax plan, you could be looking at a couple of years of 4 or 5 percent growth," Trump adviser and senior CNBC contributor Larry Kudlow told me at an event in Washington this week. "Not 100 years. Not 10, 20 years, but we never had the big spring back from the recession and I saw it in the Reagan years." Kudlow is thought to be a leading candidate to be Trump's chairman of the Council of Economic Advisers.

Others are even more dubious that Trump's plans will do much to kick the U.S. economy into a truly higher gear. "We couldn't get to sustained 4 percent growth even if we really tried," Megan Greene, chief economist at Manulife, told me this week. "Let's pretend that Trump does get all of his stimulus. That will help around the edges, but it won't fundamentally change potential GDP growth in the United States. A massive stimulus probably wouldn't hit the real economy until 2018 or 2019, and then it would be just a sugar boost that quickly peters out."

—Ben White is Politico's chief economic correspondent and a CNBC contributor. He also authors the daily tip sheet Politico Morning Money [politico.com/morningmoney]. Follow him on Twitter @morningmoneyben.