"Everything about Trump, I think, is inflationary," warns US hedge fund manager Jeffrey Ubben.
The ValueAct Capital chief executive has yanked money out of the stock market in recent weeks and is sitting on $US3 billion in client cash because he believes equity valuations are "very treacherous".
Ubben, an activist investor, argues Trump's policies, such as potential border taxes, will push up prices at a time in the economic cycle when the US Federal reserve is already poised to lift interest rates several times this year in response to rising inflation.
Trump's other evolving policies – stimulatory tax cuts, defence spending, infrastructure investment, restricting foreign labour immigration, mandating the use of American-made steel in energy pipelines and a desire to reduce imports – are also likely to be inflationary.
Consumer price index figures published last week showed inflation had jumped to a five-year high of 2.5 per cent.
The US labour market, with a 4.8 per cent unemployment rate, is at or close to full employment, Goldman Sachs says.
Goldman economists expects a fiscal easing of about 1 per cent of GDP over the next year.
US Treasury Secretary Steven Mnuchin on Thursday set an ambitious August deadline for tax reform to be passed by Congress and a goal of achieving economic growth of at least 3 per cent.
Unless Trump and conservative Republicans in Congress implement offsetting spending cuts, looser fiscal policy at a time of low unemployment will likely lead to higher interest rates, which are currently anchored near historic lows.
"We find that when the economy is at or above full employment, fiscal easing has a smaller effect on growth but a bigger effect on interest rates," Goldman economist Daan Struyven wrote in a recent research note.
"This supports our forecast that the upcoming fiscal easing in the US will boost growth only modestly but will contribute to a bigger increase in both short-term and long-term interest rates than currently discounted in the bond market."
For this reason, Fed chair Janet Yellen has repeatedly implored the new administration to focus on productivity-enhancing measures that expand the supply potential of the economy to prevent it overheating, including policies that improve education, training and workforce participation, raise public and private investment and spur innovation.
Sensing a potential clash between fiscal and monetary policies, and with federal government debt relatively high at 77 per cent of GDP, she has said there is no obvious need for a major fiscal stimulus.
Expectations of higher interest rates and a roll back of financial regulation have propelled stock prices in recent months. The US S&P; 500 is up 10.4 per cent since the November 8 election
Ubben admitted at a Reuters conference in New York that he got "super lucky" with the Trump administration's mooted financial deregulation measures, which caused the value of ValueAct's Morgan Stanley holding to spike 36 per cent since the election.
Ubben, who manages about $US16 billion, said he sold some Morgan Stanley shares after the price jump.
