What if Trump is right on the economy?

"Having gained more than 8% in value since the start of the year, the US dollar is nearing highs not seen in more than a decade, and market indicators point to even more appreciation in the coming months," wrote Prof BJ Cohen. The rise in the value of the dollar is because of increasing interest rates by the Federal Reserve to head off inflation. This is similar to what happened under Ronald Reagan and George W Bush, the dollar appreciating 60% under Reagan, between 1981 and 1985. The Federal Reserve increased its Funds rate to 1.75-2% in June this year, but under Reagan (1981 to 1989) the Funds rate varied from highs of 20% in 1981 to a low of 5.66% in August 1986 before rising to 9.75% in December 1988. The infamous Greenspan put, which saw exceptionally low interest rates, led to the subprime crisis. The Funds rate was effectively at 0% from December 2008 to December 2015, during Obama years. The Tax Cuts and Jobs Act by Donald Trump has decreased income tax rates for individual taxpayers, increased standard deductions and reduced corporate tax rate from 35% to 21%. According to the Congressional Budget Office this will add another $1.891 trillion of debt over the next 10 years to the $9.8 trillion forecast at present, to the existing national debt of $20 trillion. The problem is, "a strengthening dollar increases the price of exports abroad and lowers domestic cost of imports, thus discouraging the former and encouraging the latter." Trump has increased tariffs on a range of imports which will "put upward pressure on the domestic inflation rate, which could force the Fed to raise interest rates even faster than planned. That, in turn, would produce still more dollar appreciation and even bigger trade deficits, as happened under Reagan and Bush." A strong dollar will make exports more expensive but a hefty 14% cut in corporate tax rate means that companies can pass on benefits to customers. Higher tariffs could make imports costlier and feed into inflation but this will be offset by the strong dollar. Maybe that is why markets seem to be unconcerned, despite the S&P 500 and the Nasdaq setting record closes on 4 successive days of trading. Average inflation rate crept up above the Fed target rate of 2% since last year. "The Fed is not only raising rates but is also reducing the size of its balance sheet. The withdrawal of policy accommodation is perhaps the biggest risk for the stock market," wrote an editorial in the Mint. Low interest rates encourage reckless borrowing to fund dubious investments that lead to asset price bubbles. It is good that the Fed is tightening gradually giving time for markets to adjust. Personal dislike of Donald Trump does not mean that his policies are bad. Even for a professor.