US economic growth could face a challenging slowdown as US President Donald Trump’s administration’s powerful fiscal stimulus fades after two years, former US Federal Reserve chairman Ben Bernanke said.
He said the US$1.5 trillion in personal and corporate tax cuts and a US$300 billion increase in federal spending signed by Trump “makes the Fed’s job more difficult all around” because they are coming at a time of very low US unemployment.
“What you are getting is a stimulus at the very wrong moment,” Bernanke said on Thursday during a policy discussion at the American Enterprise Institute, a Washington think tank. “The economy is already at full employment.”
The stimulus “is going to hit the economy in a big way this year and next year, and then in 2020 Wile E. Coyote is going to go off the cliff,” Bernanke said, referring to a hapless character in the Road Runner cartoon series.
Bernanke, who stepped down from the US central bank in 2014, is a fellow in residence at the Brookings Institution in Washington.
The US Congressional Budget Office in April forecast that the stimulus would lift GDP growth to 3.3 percent this year and 2.4 percent next year, compared with 2.6 percent last year. According to the office’s projections, GDP growth would to 1.8 percent in 2020, while Fed officials predicted 2 percent growth in 2020 in their March median projection.
The degree of slowdown as stimulus fades is a matter of debate among economists, with some predicting the effects could last beyond two years if the US boosts its capital stock and upgrades its workforce during this period of strong growth.
Congress could also write new spending laws to smooth out the program, Bernanke said.
With the stimulus coming at a time of already low unemployment — the jobless rate was 3.8 percent in May, matching the lowest in almost five decades — Fed officials have projected that inflation would likely overshoot their 2 percent target, resulting in a slightly restrictive monetary policy in the future.
Bernanke was followed at the discussion by former Fed governor Kevin Warsh, who said that he would speak loosely from his prepared remarks and joked: “I am not going to speak as loosely as Ben did when he made the Wile E. Coyote reference and what happens to the economy in 2020.”
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