Trump's Fiscal Tightening: A New Strategy to Influence Fed Policy

President Trump may be exploring a novel strategy to influence the Federal Reserve's monetary policy: fiscal tightening. According to Nir Kaissar, head of asset management company Unison Advisors, the impact of fiscal policy has been at least as significant as the Fed's actions in recent years. Now, fiscal policy and monetary policy may be on the verge of swapping roles.

Treasury Secretary Scott Bessent has indicated that the government aims to reduce the deficit to 3% of GDP. This would require Trump's Department of Government Efficiency (DOGE) to cut $1 trillion in spending. While it remains unclear to what extent this target can be achieved, the mere threat of spending cuts may already be dampening market sentiment and hindering economic growth.

Through expenditure cuts, Trump may be pushing for monetary policy to ease in support of fiscal tightening. Whether Trump's spending cuts result in economic slowdown or are inconsequential may not matter. As long as these cuts (or the threat of cuts) coincide with an economic slowdown, the Fed may take action.