Fed is Not Sure about Trump, but Thinks In­vestors Ig­nor­ing Risks

The Economic Times - - Companies: Pursuit Of Profit -

New York: The Fed­eral Re­serve still hasn’t made its mind up about Pres­i­dent Don­ald Trump’s poli­cies.

Based on the cen­tral bank’s most re­cent com­mu­ni­ca­tion — the Fed min­utes for the Jan­uary/Fe­bru­ary meet­ing re­leased on Wed­nes­day — the mem­bers of the FOMC are still un­de­cided about the ul­ti­mate ef­fect of Trump’s eco­nomic agenda, par­tic­u­larly fis­cal stim­u­lus, or if it will even hap­pen at all.

“Par­tic­i­pants again em­pha­sised their con­sid­er­able un­cer­tainty about the prospects for changes in fis­cal and other gov­ern­ment poli­cies as well as about the tim­ing and mag­ni­tude of the net ef­fects of such changes on eco­nomic ac­tiv­ity,” said the min­utes.

It ap­pears that while some mem- bers noted that a pro­posed $550 bil­lion in­fra­struc­ture plan and other stim­u­lus moves from Trump could be a boon for eco­nomic growth, other mem­bers were con­cerned about the ul­ti­mate im­pact.

“In dis­cussing the risks to the eco­nomic out­look, par­tic­i­pants con­tin­ued to view the pos­si­bil­ity of more ex­pan­sion­ary fis­cal pol­icy as hav­ing in­creased the up­side risks to their eco­nomic fore­casts, al­though some noted that sev­eral po­ten­tial changes in gov­ern­ment poli­cies could pose down­side risks,” said the Fed’s min­utes.

In­con­sis­tent mar­kets In fact, while the Fed of­fi­cials de­bated the out­come of the poli­cies they noted that the pos­si­bil­ity of the fis­cal stim­u­lus had been a con­trib­u­tor to the re­cent all-time highs in stocks. They did warn, how­ever, that the mar­kets may not be fully pric­ing in the risks from the Trump pro­pos­als.

“They also ex­pressed con­cern that the low level of im­plied volatil­ity in equity mar­kets ap­peared in­con­sis­tent with the con­sid­er­able un­cer­tainty at­tend­ing the out­look for such pol­icy ini­tia­tives,” said the min­utes.

Some mem­bers cited the pos­si­bil­ity of in­creased in­fla­tion from the poli­cies , which is good un­less the rate of price in­creases over­shoots the Fed’s 2% tar­get. A large fis­cal stim­u­lus pack­age with the la­bor mar­ket so tight would, in the­ory, kick in­fla­tion into a higher gear.

In­ter­est­ingly, the min­utes also in­clude mul­ti­ple ref­er­ences to “other poli­cies” that could be passed un­der Trump and their un­cer­tain im­pact on the economy. “Mem­bers agreed that there was height­ened un­cer­tainty about the ef­fects of pos­si­ble changes in fis­cal and other gov­ern­ment poli­cies, but that near-term risks to the eco­nomic out­look ap­peared roughly bal­anced,” said the min­utes.

Fed Chair Janet Yellen an­swered ques­tions on two of Trump’s seem­ingly non-eco­nomic poli­cies dur­ing her tes­ti­mony to the Se­nate Bank­ing Com­mit­tee: cur­tailed im­mi­gra­tion and the re­peal of the Af­ford­able Care Act.

Both of these poli­cies, said Yellen, could pro­duce drags on the US economy and would fac­tor into the de­ci­sions re­gard­ing mon­e­tary pol­icy for the Fed as their ef­fect be­came clearer.

In the end, how­ever, much of the eco­nomic im­pact is un­cer­tain to the Fed and how it will im­pact their pol­icy re­mains un­clear. Es­pe­cially, as the FOMC mem­bers noted, since they don’t know what poli­cies are com­ing at all.

Said the Fed, “A few par­tic­i­pants com­mented that the re­cent in­crease in equity prices might in part re­flect in­vestors’ an­tic­i­pa­tion of a boost to earn­ings from a cut in cor­po­rate taxes or more ex­pan­sion­ary fis­cal pol­icy, which might not ma­te­ri­alise.”

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