What Booming Markets Are Telling Us About the Global Economy 

Neil Irwin
 
 
The stock market reached yet another new high on Wednesday, the latest development to make a mockery of what savvy economic commentators thought they knew about the world.
 
Consider how things looked one year ago. The world economy seemed hopelessly trapped in a cycle of low growth and inflation. Markets recoiled at the mere possibility that the Federal Reserve would raise interest rates. Populist political insurgencies seemed to threaten yet more financial market chaos.
 
Now, interest rates and inflation forecasts have risen substantially from last winter’s lows; financial markets are shrugging off — or even rallying at the possibility of — imminent Fed rate increases; and it is all taking place during Donald J. Trump’s presidency.
 
An economy that seemed locked in some form of “secular stagnation” or “new normal” is at long last showing some signs of being in something closer to an “old normal.” The United States manufacturing sector is showing strength, and the broader mix of market and economic data from around the world in the last few months also points to a world where a vicious economic cycle isn’t looking quite as scary and may even be ending.
 

“There’s no question that animal spirits have been unleashed a bit post the election,” Mr. Dudley told CNN.
 
A year ago, hints that the Fed would move quickly with rates would have sent markets into a tailspin. As 2016 began, Fed leaders were expecting to raise rates four times in that year, plans that helped send the stock market plummeting and measures of economic pessimism soaring. Then they backed off and only raised rates once.
 
Since a stock market rally began on Election Day, there has been plenty of discussion about a Trump effect. And no doubt a big part of the improvement has resulted from expectations that the new president’s policies will help corporate bottom lines (and that some of the risks of his trade agenda won’t materialize).
 
But it’s worth keeping in mind that a so-called Trump bump arrives as the economy is closing in on its full productive capacity. It is getting to the point where a cycle of rising wages and higher inflation necessitates higher interest rates. That, in turn, reflects policies from the Obama administration and the Fed that long predate Mr. Trump’s election.
 
Conventional economic theory predicts that if a government tries to increase deficits at a time of full employment, the results will be some mix of higher inflation and higher interest rates, crowding out investment.
 

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