ALL ABOARD THE TRUMP TRAIN
Mark Lister, 8 March 2017
The Trump train is going full steam ahead, and even Janet Yellen and the Federal Reserve seem to have climbed aboard.
A number of Fed officials spoke publicly last week, including Yellen herself. They all talked up the US economy, noted the strong labour market, and said inflation was heading back to where it should be.
Markets took notice, especially when Fed member and long-time low interest rate campaigner Lael Brainard appeared to change her tune.
The upshot of all of that is markets now see another US interest rate hike next week as a done deal, or very close to it. That’s a huge change from a week or two ago, when odds were sitting at just 40 per cent.
Many expected the Fed to sit tight before moving again, in part due to uncertainty around the new leadership and what sort of disruptive policy changes we might see.
Not so anymore. They’ve declared the US economy on the right track and able to cope with a further ramp up in interest rates. They can’t be too worried about what the President is up to.
The US sharemarket was way ahead of the central bank, declaring Trump good for the economy the day after the election. Since then the S&P500, Dow Jones and NASDAQ indices in the US have all rallied some 10-15 per cent, hitting new record highs.
It’s not only Wall Street that’s been cheering, with main street America clearly feeling upbeat too. Small business optimism is at its strongest levels in 12 years, consumer confidence has hit a 15-year high, and US manufacturing activity has risen to a two-and-a-half-year peak.
Those small businesses and consumers can’t all be one-eyed Trump supporters with blinkers on.
The enthusiasm isn’t surprising when you think about some of his policies. Lower corporate taxes are a big deal for the economy, and the sharemarket. At 35 per cent, the US corporate tax rate is a lot higher than ours (which is 28 per cent) and cutting it to 20 per cent would be substantial.
Before you say there’s no way he’ll be able to pay for it, corporate tax is only about a tenth of the US tax take, so he quite possibly can.
Deregulation is a word businesses tend to love as well. Ask anyone from the local café to your panel beater, and they’ll say cutting red tape and bureaucracy is a sure-fire way to get them thinking more about growing, hiring and investing.
It’s not surprising markets have responded the way they have since November, but whether such euphoria is justified remains to be seen. Aside from whether all these plans can be successfully implemented, we must be mindful of what offsetting negative ones emerge.
The border tax and other protectionist trade policies are top of the list in this regard, but we haven’t heard him talk about those as much lately. That doesn’t mean they’ve gone away, but for now they show no signs of derailing the Trump train and its excited passengers.
This article was originally published in The New Zealand Herald on 8 March 2017.