Olivier Blanchard, the former chief economist of the International Monetary Fund, stated on Wednesday that the economic policies of the Trump administration may lead to an overheated economy and higher inflation, which will result in the Federal Reserve raising interest rates.

A recent survey by foreign media shows that most economists expect that due to the policies proposed by Trump potentially leading to rising inflation, the rate cut by the Federal Reserve in 2025 will be less than their expectations a month ago.

Sustained strong economic growth, stubbornly high inflation, and the stock market repeatedly hitting new highs have become obstacles hindering the Federal Reserve from quickly cutting interest rates. Federal Reserve Chairman Powell stated last week, "The economy has not sent any signals that require us to urgently lower interest rates."

Market pricing indicates that the probability of a rate cut in December is now below 60%.

The risk of conflict between the Trump administration and the Federal Reserve is very high, Blanchard said during a discussion of a recent article hosted by the Peterson Institute for International Economics. Blanchard is a senior researcher at the institute and a former president of the American Economic Association.

Although the high inflation caused by the COVID-19 pandemic surprised the Federal Reserve, Blanchard successfully predicted this outcome, which brought him fame.

Blanchard stated that the three pillars of Trump's economic plan will all lead to higher inflation.

Imposing tariffs on imported commodities will lead to economic overheating and rising price pressures. Expelling illegal immigrants will result in labor shortages and wage increases, while tax cuts will also cause economic overheating.

He stated, "There are three reasons to believe that the Federal Reserve may see higher inflation. We do not know how serious inflation will be, but it is the Federal Reserve's responsibility to prevent such a situation from occurring." He added that this would lead to rising interest rates and a stronger dollar, which is not what Trump wants.

Blanchard said, "If the Federal Reserve does what it must do, it will hinder Trump from getting what he wants."

Blanchard is very confident that Powell will "steadfastly" adhere to the necessity of potential interest rate hikes before the end of his term in mid-2026.

He said that he does not even think the person who ultimately replaces Powell will able to keep interest rates low at a time when inflation expectations are rising. He added, "Most people will insist that the Federal Reserve maintains its mission of stability and low inflation."

Editor/Lambor