Chair Yellen reiterated her stance on wanting to deliver, if possible, another rate hike in December when she addressed the National Association for Business Economics in Cleveland on September 26th.
Although Fed fund futures priced in a 75% chance of a December rate hike, the Fed remains, at its core, data dependent, and will monitor carefully economic releases leading to the meeting. And Chair Yellen will adhere to her policy of making certain that markets aren’t surprised by a move to tighten well before the meeting. With rates still accommodative at 1.00% to 1.25% for the Fed funds rate, the challenge will be how monetary policy responds to the advent of stimulative fiscal policy, and perhaps tax reform and infrastructure spending. This could be the next chair’s challenge.
The question of who replaces Yellen, if she doesn’t continue in the chairmanship, has become a subject of intense speculation within the academic and market communities. Although the president recently said “I like her and I respect her, but I haven’t made that decision yet,” Chair Yellen commented that she intends to finish her term as chair, and that she hasn’t met with the president since an earlier initial meeting. Current speculation focuses on former Federal Reserve Board Governor Kevin Warsh, finance professor John Taylor, current Federal Reserve Board member Jerome Powell, and Yellen herself. Gary Cohn, the Director of the National Economic Council, could possibly regain the lead if he delivers the tax reform legislation the president sees as crucial to ensuring that the economy grows at a level commensurate with a stronger economy.
THE TAX PACKAGE
A detailed outline of the Trump administration’s tax reform package was delivered at the end of September. Given the emphasis on a competitive corporate tax rate (20%, down from 35%), repatriation of corporate capital parked overseas, and middle-class tax relief, there is much anticipation to review what could be an important catalyst for investors.
The president, along with legislative leaders, is campaigning for support throughout the country, emphasizing that “First and foremost our tax system should benefit loyal, hardworking Americans and their families. That is why tax reform must dramatically simplify the tax code, and eliminate special-interest loopholes.”
Senate Majority Leader Mitch McConnell and the Republican leadership remains convinced that passage can be achieved via the reconciliation process, which would require only the 51 Republican votes. But before this step is taken, the House and Senate need to pass a budget resolution. Given the internecine politics based on deep philosophical fissures within the Republican Party, the president is waiting and watching to see if this can go through smoothly.
The president still vividly remembers the initial “Repeal and Replace” defeat as the Republican Party’s fiscally conservative wing, the Freedom Caucus, kept legislation from moving forward. Republican senators continue to fight for the repeal of the Affordable Care Act, but garnering enough votes for a viable replacement has been a difficult struggle.
Otherwise, Trump may bring in his “friends” from across the aisle to try and forge a deal. The president has very publicly reached across party lines, much to the chagrin and embarrassment of the Republican leadership, to join forces with “Chuck and Nancy,” Senate Minority Leader Chuck Schumer and House Minority Leader Nancy Pelosi, on the debt ceiling extension, government funding proposals, as well as emergency hurricane aid. The president’s approval ratings inched higher as he “got the deal done,” and the market applauded as well.
However, to include Democrats in the voting, the president would need 60 votes in the Senate for passage, a difficult feat. Senate Finance Committee Chairman Orrin Hatch reminded listeners on CNBC that tax reform is going to be “much harder than health care.”
The most current framework of the plan, drawn up by the so-called “Big Six” congressional leaders along with cabinet officials, will work its way through the legislative channels of the Senate and House, where it will be subject to the typical horse trading that is part and parcel of the process.
In terms of the budget resolution that needs to be passed, warning shots have already been fired at the Freedom Caucus, most publicly by the Wall Street Journal, which in a blunt editorial says, “Now the gang has pivoted in private to target expensing provisions, while claiming in public that they have no idea what the reform includes. The real question is whether any concession will appease them—or if they’ll keep moving the goalposts until the bill is impossible to pass. The political reality is that the budget resolution has only one purpose: A vehicle to pass tax reform in the Senate with 51 votes. Everything else is political eyewash.”