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The Fed Vindicates Trump's Tax Cuts

The Fed Vindicates Trump's Tax Cuts
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Sunday, 25 March 2018 05:48 PM Current | Bio | Archive

The Federal Reserve raised interest rates again on Wednesday, insisting that the jobs market was “strong” and indicated that it might accelerate the pace of increases in 2019.

The quarter percentage point rise to a range of 1.5 per cent to 1.75 per cent was the sixth such increase since 2015 and comes as the central bank appears to be moving more quickly – albeit slightly - to end an era of historically low interest rates that began during the last global financial crash.

The Fed began exiting its decade-long dalliance with unorthodox monetary policy under former chair Janet Yellen. Now Jay Powell is in charge and we see a welcome fresh vigor given to this process, and he clearly welcomes the stimulative fiscal policies from the White House that will help him to return interest rates - the price of money - to more normal levels.

In a vindication of President Trump’s tax cuts, Fed chairman Jay Powell last week painted an optimistic picture of the U.S. economy while announcing a widely expected 25bp interest rate hike.

He told the press conference that the American economy is at its healthiest point since the financial crisis of a decade ago, and that the tax cuts agreed by Congress in December will help sustain economic growth. They will help to deliver “meaningful increases” in demand over the next few years, he said, and in addition they will promote new investment that will have a much longer impact on productivity growth.

A total of $1.5 trillion of tax cuts are likely to add half of a percentage point to GDP growth this year and next.

However, because stronger demand in the economy may fuel inflation, the average interest rate forecast from the Fed’s monetary policy committee, for the end of 2019, has risen from 3.1 per cent to 3.4 per cent.

If the Fed has reservations about growing federal government deficits, it is not saying so. Instead it is perhaps grateful that the fiscal boost to growth will help allow it to raise interest rates to a normal level. The normalization of interest rates, and the unwinding of the Fed’s quantitative easing (QE) program, are both long standing goals of the Fed as it tries to reverse the atypical monetary policies forced onto it by the financial crisis.

Powell believes that interest rates should be higher, partly so they can then be cut again should the economy weaken. In addition, the Fed is concerned that current low interest rates and bond yields have contributed to a large build-up of debt in the U.S and global economy. This may prove unsustainable in a weaker economic environment, and higher borrowing costs will, it is hoped, curb enthusiasm for credit from weak borrowers.

In seeking to accelerate the rise in the cost of money, and so both limit “malinvestment” and at the same time allow room for cuts should they be needed, Powell is to be commended. It is also nice to see President Trump’s often criticised tax cuts being given credit by the Fed, for helping the central bank in its goal.

Nigel Green is founder and CEO of deVere Group. One of the world’s largest independent financial advisory organizations, de Vere does business in 100 countries and has more than $12 billion under advisement.

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NigelGreen
In a vindication of President Trump’s tax cuts, Fed chairman Jay Powell last week painted an optimistic picture of the U.S. economy while announcing a widely expected 25bp interest rate hike.
fed, trump, tax, cuts
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2018-48-25
Sunday, 25 March 2018 05:48 PM
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