Bridgewater Co-CIO: Trump may choose a Federal Reserve Chair who can "tolerate" high inflation and allow for interest rate cuts

On Wednesday, Bridgewater Associates Chief Investment Officer Bob Prince stated that Trump's tariffs, fiscal stimulus, and immigration policies may make it difficult for the U.S. to achieve its inflation target of 2%.

Prince mentioned at the third Global Financial Leaders Investment Summit in Hong Kong that if the U.S. inflation rate approaches 3% in six months, Trump may consider nominating a Federal Reserve chairman who is more inclined towards a higher inflation target to create conditions for interest rate cuts.

He noted that while the market generally hopes for interest rate cuts, the likelihood of such cuts would significantly decrease if inflation remains high:

“I expect that at the end of Chairman Powell's term in 18 months, the Federal Reserve's monetary policy will face an interesting turning point.”

Trump's Policies May Prevent the U.S. from Achieving a 2% Inflation Target

Prince believes that if Trump is re-elected, the U.S. will face higher inflation levels because Trump's promised pro-business and growth policies will 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 in Bangkok that investors should still consider allocating funds to assets with strong inflation protection:

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

Trump has repeatedly expressed criticism of Powell, who stated that he would not resign if Trump asked him to.

Powell 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.”

Policies May Be More Favorable for the Stock Market

Analysts believe that if Trump fulfills his promises regarding tax cuts, immigration restrictions, and tariffs, U.S. monetary policy may face resistance next year.

Prince pointed out that Trump's policies could drive an increase in nominal growth rates, which would keep spending at high levels while making the yield curve steeper.

“Thanks to deleveraging over the past few decades, household balance sheets are in 'quite good shape,' and stable wage growth means that consumer spending relies more on income rather than credit.”

Analysts indicated that under the stimulus of Trump's fiscal policies, investors may not receive the substantial interest rate cuts they originally expected.

Prince believes that such an environment would be more favorable for the stock market, as companies facing rising costs can offset the impact of increased costs by raising product prices, thereby maintaining or even increasing profits. In this scenario, corporate profitability would not be significantly harmed and may even grow.

Prince added that the challenge facing the stock market is that investors have not only priced in the strongest decade of corporate earnings in the past ten years but have also fully considered the possibility of this earnings growth trend reappearing in the future.