The U.S. is headed for a recession in the next two years as excessive fiscal stimulus from the President Donald Trump administration takes the economy into unsustainable territory, Adam Posen, president of the Peterson Institute for International Economics, told CNBC Tuesday.
Posen, who served at the Federal Reserve Bank of New York in the mid-90s, said that GDP (gross domestic product) growth targets of 3 percent or more are unobtainable given current productivity and employment rates in the U.S. Add to that intended tax cuts and financial deregulation under Trump and the country will find itself trapped in a boom-bust cycle, Posen said.
“The work force is only growing at 0.5 percent and productivity’s at 1 percent so it can’t reach these 3-4 percent growth targets. If unemployment is, unfortunately, about as low as it’s going to go, you can’t pick this up,” he told CNBC Tuesday.
“Then you’re going to get financial deregulation, which in some ways is a good thing but is likely to feed further credit boom, as it’s always done in the past, so the Fed will start tightening against this – that’s your boom-bust cycle.”
Already the Federal Reserve is trying to manage signs of a growing U.S. economy by gradually increasing interest rates. Earlier this month, it hiked rates by 25 basis points, its first such move this year and only the third since the financial crisis. However, further increases are expected this year, with Posen anticipating three extra hikes by December and more still in 2018.
“The Fed is going back to normal in the sense that it’s not scared to do the moves that it would normally do in response to the forecast,” he said.
He added that anything Trump outlines in terms of fiscal policy is only likely to spur the Fed’s rate hike agenda.
“You’re nearing the end of this Fed regime and it’s not just Chair (Janet) Yellen, Vice-Chair (Stanley) Fischer (who get a say), President Trump gets to appoint five members of the seven member Federal Reserve Board of Governors in the next 10 months and so you want to get this policy of tightening underway before that uncertainty kicks in,” noted Posen.
Posen suggested that Trump is likely to want to appoint dovish board members, or those who are likely to keep interest rates at low levels. However, he will also be looking for candidates who are “willing to take his phone call…”, according to Posen. This may limit his options, Posen suggested.