Tim Duy, Columnist

Trump's Trade Policies Could Work Against Fiscal Stimulus

A steep tariff will undoubtedly impose higher costs on a large swath of the U.S. economy.

February 28, 2018 at 12:00 PM UTC

Tim Duy is a professor of practice and senior director of the Oregon Economic Forum at the University of Oregon and the author of Tim Duy's Fed Watch.

The great fiscal experiment.
Photograph: Pool

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The U.S. government has set the stage for an economic experiment with its large, late-cycle fiscal stimulus, but the Trump administration's trade agenda threatens to undermine the process as soon as it begins.

Tax cuts and spending increases are projected to fuel an ill-advised federal budget deficit for 2019 in excess of $1 trillion. With the economy operating near full employment, the extra impetus from deficit spending could cause inflation to overheat. The Federal Reserve would respond with a rapid increase in interest rates that triggers a recession. The fiscal stimulus thus shortens the expansion.