Trump closes on $1.5trillion tax cuts
Value of bank stocks rise as president’s budget plans gain Senate approval, clearing way for final vote
BANK stocks jumped yesterday after Donald Trump moved a step closer to slashing taxes in a $1.5trillion (£1.1trillion) boost to the US economy.
Markets anticipate extra economic growth and more interest rate hikes from the Federal Reserve, improving prospects for lenders who have struggled under the burden of ultra-low interest rates since the financial crisis.
US banks closed up 1.6pc yesterday leading the wider S&P 500 index of stocks up 0.5pc to fresh highs.
The US Senate vote in favour of a 2018 budget resolution on Thursday night means the president will only need a simple majority of 51 senators, rather than 60, to pass his tax cuts.
As a result he will not necessarily need to seek the support of Democratic legislators, assuming he can convince sufficient Republicans to back him. A major programme of tax cuts was key to the president’s election campaign, with pledges to slash income and business taxes, as well as cutting some of the deductions and loopholes which complicate the system.
The latest budget bill opened the way for tax cuts of $1.5trillion over 10 years, and also allows for extra spending in areas such as defence.
Stocks climbed modestly with the S&P 500 and the Dow Jones Industrial Average closing up more than 0.5pc, and gold sliding 0.6pc. Treasury yields climbed to a nine-year high while the move also raised expectations of further interest rate hikes from the Federal Reserve. Analysts believe the move should support stocks over the coming months – but those hoping for rapid progress on the tax plans may be disappointed.
“Overhauling the tax code and cutting taxes significantly, as planned by the president, is a very complex process and it will be no easy task for the administration to please all sides and get enough support for the final tax bill to be passed,” said Brian Davidson at Fathom Consulting.
“We believe that large corporate tax cuts will eventually be enacted, but this is more likely to happen in the first or second quarter next year, and not later this year as the administration hopes.”
For markets “the upshot is that we expect the so-called ‘Trump trade’ to come back to life as tax reform progresses, although it may be a bumpy ride as delays occur and divisions between Republicans are made public,” he said.
Mr Trump has pinned his hopes on tax cuts and spending hikes creating a substantial economic boost, with the result that tax revenues ultimately rise sufficiently to limit extra borrowing.
Economists remain sceptical of the proposals, however, and some Republicans are also keen to avoid a large increase in borrowing. Meanwhile, reports indicate that Jerome Powell, a governor at the Federal Reserve, is now the favourite candidate to replace Janet Yellen at the top of the central bank.
Ms Yellen had been considered a shoo-in by markets as unemployment is low and inflation under control. But in August she criticised the president’s plans to roll back the banking regulations introduced since the credit crunch and this is thought to have damaged her chance of being re-appointed when her term of office expires in February.