Perfect inflation storm sees Trump and US Fed “draw battle lines”

New market commentary from global financial advisory, deVere Group, has highlighted the potential “investor fallout” from an inflation battle between the US Federal Reserve and Donald Trump, if the incumbent president were to continue on his current fiscal policy trajectory.

In comments made last week, deVere Group chief executive, Nigel Green, warned investors of the potential for “significant turbulence” and market volatility as Trump holds firm on his policy promises designed to encourage economic growth, including his fiscal stimulus plans, tax cuts and protectionist trade attitudes including raising tariffs.

Concerns have since arisen that this agenda sets him at odds with the central bank’s goal to reduce inflation to its target of two per cent, and they haven’t been helped by the relationship between the Fed and the US Government during the President’s first time, during which some believed Trump questioned the central bank’s independence.

The battle lines are likely already being drawn between the Fed and the White House, and investors should prepare for the fallout,” Green said.

“President Trump’s policies are creating the perfect storm of inflationary pressures, and the Fed may have no choice but to act. This could trigger significant market volatility.

“The central bank has historically used interest rate hikes as a tool to combat inflation, but doing so in a period of fiscal stimulus could choke growth and unsettle markets.

“The Fed may feel compelled to raise rates to rein in inflation, which has already proven to be remarkably sticky.

“But higher interest rates would be expected to slow the economy, impact corporate profits, and shake investor confidence. This is a delicate balancing act with no easy solutions.”

Green has urged investors to re-think their position and whether their portfolios are well-defended enough against potential market instability.

“A diversified strategy, incorporating inflation-hedging assets such as commodities, as well as a focus on high-quality equities and structured products will be key to managing this challenging environment,” Green said.

“Investors must be proactive, not reactive. Those who take decisive action now will be better positioned to capitalize on opportunities and mitigate risks in what promises to be a highly volatile period.

“Emerging markets are typically the first to feel the impact of tighter US monetary policy. Investors should remain vigilant about exposure to these regions and consider strategies to mitigate potential risks.”