Bridgewater CIO: Trump's policies may "add obstacles" to inflation targets and may nominate a more dovish Federal Reserve chairman

According to the Zhitong Finance APP, Bob Prince, Chief Investment Officer of Bridgewater Associates, stated on Wednesday that the policies of President-elect Donald Trump regarding tariffs, fiscal stimulus, and immigration may prevent the United States from achieving its 2% inflation target. Speaking at the third annual Global Financial Leaders Investment Summit held in Hong Kong, he mentioned that if U.S. inflation approaches 3% in about a year and a half, Trump may be inclined to nominate a Federal Reserve Chair who would adapt to a higher target and allow him to lower interest rates.

He added, "The market has a willingness to lower interest rates. However, if inflation continues to rise, it may not be possible to lower rates, and I think this will create an interesting situation in 18 months when the current Chair Jerome Powell's term ends."

Prince also joined some of his peers in warning investors that if Trump is re-elected, they will face higher inflation levels, 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, stated at the Forbes CEO Conference held in Bangkok, "Investors should still consider putting money into assets with strong inflation protection." "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 criticized Powell, who had stated that he would not leave his position if Trump asked him to resign. Powell said 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 any urgency for policymakers to lower interest rates.

If Trump fulfills his campaign promises regarding tax cuts, immigration restrictions, and tariffs, U.S. monetary policy may face resistance next year.

Prince stated that Trump's policies could create a scenario of nominal growth rates being higher, with spending remaining at elevated levels and the yield curve tending to steepen. He noted that household balance sheets are in "quite good shape," aided by decades of deleveraging, and added that stable wages mean that spending is primarily funded by income rather than credit.

Combined with fiscal stimulus, investors may not receive the genuine interest rate cuts they previously anticipated. Prince indicated that this environment is more favorable for the stock market, as companies with pricing power can convert nominal spending into nominal profit growth.

Prince added that the challenge facing the stock market is that investors have not only priced in the best 10 years of corporate earnings over the past decade but have also fully considered the possibility of this happening again