17 Dec

Threading the needle

first_imgA very interesting article appeared in Bloomberg News this week: “Trump Counts on Fed to Help Sustain Economic Bump from Tax Plan.”As written in the article, “The Trump administration is banking on the Federal Reserve not to squelch any bump in economic growth from the Republican tax plan. White House chief economist Kevin Hassett argues that the tax overhaul will boost productivity, allowing the U.S. economy to grow more rapidly without risking a damaging bout of higher inflation that would be an anathema to the Fed.“’I totally respect the independence of the Fed. I would never give them advice,’ Hassett, who heads President Donald Trump’s Council of Economic Advisers, said in a Nov. 16 interview. But such supply-side boosts to the economy ‘don’t create interest-rate paths that are wildly inconsistent’ with the Fed’s current projections, according to macroeconomic models.”The administration’s tax overhaul needs to thread quite a few needles—and not only in the chambers of Congress. One additional needle is the Fed. These statements by Mr. Hassett show how aware they are of the threat of the Fed’s monetary policy reducing the effectiveness of a tax cut. The White House needs this very optimistic view on increased productivity to be shared by the Fed. However, the Fed has to be convinced that a corporate tax cut, like the one proposed, will boost elusive labor productivity to such an extent that we can achieve sustained three-percent economic growth without sparking corrosive inflation. Communications from the Fed have generally been skeptical of any fiscal plan that reduces revenues without equal cuts in federal spending. With the economy near or at full employment, many in the Fed really do not sound like they share the same enthusiasm for a large tax-cut plan. continue reading » 11SHARESShareShareSharePrintMailGooglePinterestDiggRedditStumbleuponDeliciousBufferTumblrlast_img read more