Mexico’s central bank raised short-term interest rateshalf a percentage point in response to the peso’s 11% plunge since Mr. Trump was elected. The Bank of Mexico is worried that the depreciation will push up inflation, and by raising rates it will restrain spending and contain those price pressures.
.. This, of course, is the opposite of what Mr. Trump intends. On the campaign trail, he cited the elevated U.S. trade deficit as proof of how foreigners were cheating the U.S. through badly negotiated deals like the North American Free Trade Agreement.
.. But as I noted in a column a month ago, Mr. Trump’s fiscal and trade policies are in conflict. His plans to slash taxes and boost infrastructure spending will inflate the budget deficit and stimulate an economy already close to full employment. To prevent an outbreak of inflation, the Federal Reserve will raise interest rates more quickly, pushing the dollar higher. The combination of a stronger dollar and stronger domestic demand will curb exports and suck in imports, causing the trade deficit to widen.
.. Ford’s decision to keep SUV production in Kentucky instead of Mexico at the margin will reduce imports from Mexico. But that will likely matter less than if less Mexican consumption and a strong dollar hit U.S. exports. Those are the unintended consequences of Mr. Trump.