Bridgewater: Trump may prefer a Federal Reserve chair candidate who is more tolerant of inflation

Bob Prince, Chief Investment Officer of Bridgewater Associates, stated on Wednesday that President-elect Trump's policies on tariffs, fiscal stimulus, and immigration may prevent the U.S. from achieving its 2% inflation target.

Speaking at the third annual Global Financial Leaders Investment Summit held in Hong Kong, he said, if the U.S. inflation rate remains close to 3% about a year and a half from now, Trump may be inclined to nominate a Federal Reserve chairperson willing to accommodate a higher inflation target, which would allow him to cut interest rates.

He added, "People are looking forward to interest rate cuts. But if inflation remains unchanged, it may not be possible to cut rates. I think the situation in 18 months will be interesting, as the current Federal Reserve Chair Jerome Powell's term will end."

Prince also joined some of his peers in warning investors that a second term for Trump would lead to higher inflation, as Trump's promised pro-business and growth policies would put pressure on prices and limit labor expansion.

John Studzinski, Vice Chairman and Managing Director of Pacific Investment Management Company (PIMCO), stated at the Forbes CEO Conference held in Bangkok, “Investors should still consider allocating funds to assets with strong anti-inflation properties.”

He said, “Inflation will not disappear, and the proposed tariffs in the U.S. will affect prices. Geopolitical risks in the Middle East are also major risks to supply chains and logistics costs.”

Trump has previously criticized Powell harshly. Powell has stated that he would not resign if Trump asked him to. He mentioned at a press conference earlier this month that any attempt to demote him or any other Federal Reserve governor is “not permitted by law.”

The Federal Reserve Chair indicated that the recent performance of the U.S. economy has been “very good” and has not signaled that policymakers should rush to cut rates.

If Trump fulfills his campaign promises of tax cuts, immigration restrictions, and tariffs, the Federal Reserve's loose monetary policy may face resistance next year.

Prince stated that Trump's policies could create a scenario of nominally higher economic growth, with spending remaining at elevated levels and the yield curve steepening. He noted that thanks to deleveraging over the past few decades, American household balance sheets are in “fairly good shape,” and stable wages mean that spending is primarily funded by income rather than credit.

Coupled with fiscal stimulus measures, investors may not achieve the extent of interest rate cuts they previously sought. Nevertheless, Prince believes that this environment is more favorable for the stock market, as companies with pricing power can convert nominal spending into nominal profit growth.

He added that the challenge facing the stock market is that investors have not only digested the best decade of corporate earnings but have also fully considered the likelihood of such a scenario occurring again