"Kee" Points with Jim Kee, Ph.D.


  • Budgets and Taxes
  • Fed Appointment
  • The Fed and the Economy

 

Budget


Markets finished the week on a strong note as the Senate passed a budget bill on Thursday that was seen as a prerequisite to tax reform (Market Watch). I don’t think anyone thinks this budget for fiscal 2018 is anything but a vehicle to facilitate tax reform, but it does articulate the Senate GOP’s (Republican’s) political vision, i.e. maintaining spending in 2018 at 2017 levels, with nondefense spending cuts in future years and reduced Medicare spending over the next decade (TheHill.com). It is generally conceded that little of this will be enforceable without further legislation, which is why it is taken pretty lightly.


Tax Reform


Tax reform is important, and some progress towards simplification and permanence would be beneficial to the economy (i.e. market participants – you, me, business entities) and supported by both political parties. Whether that occurs with higher or lower rates, on the other hand, is where the political divide occurs. With respect to businesses, a reduction in the corporate tax rate and on income earned overseas seems most likely at this point, while there is less clarity on things like allowable tax deductions (including the interest deduction), depreciation schedules (versus expensing), and pass-through businesses. On the individual side, there will probably be fewer brackets (perhaps 3 or 4) but the income thresholds at which those take place are not yet known (but of course most important). There are hundreds of potential topics here (Estate taxes? Mortgage deductions? State income tax deduction? Etc.), but the above are getting the most attention from the administration (Whitehouse.gov).


Appointing a Federal Reserve Chair


Janet Yellen’s term as Fed Chair ends in February, and a there is a lot of media buzz surrounding the question of whether President Trump will re-appoint her, or whether he will choose some other candidate. Trump’s biggest issue with Yellen is probably her relative enthusiasm for banking regulation, particularly the Dodd-Frank Banking Act. Two potential candidates, John Taylor and Kevin Warsh, are considered to be a little more “hawkish” than Yellen, meaning they are more anxious to normalize rates and reduce the Fed’s balance sheet. But Fed Governer Jerome Powell, largely considered to be the front-runner (Greg Valliere), tends more towards Yellen and a gradualist (“dovish”) stance by the Fed but with a different regulatory bent (other potential candidates are former US Bancorp CEO Richard Davis; Columbia University’s Glenn Hubbard, former BB&T head John Allison, and Trump economic adviser Gary Cohn).


The Fed and the Economy


Looking to the importance of all of this, I always go back to the fundamental notion that wealth is created by production and exchange. Monetary policy and fiscal policy can facilitate specialization and exchange, but in and of themselves cannot create wealth. Many argue, and I am certainly in this camp, that the best the Central Bank can do is to, (1) ensure a stable-valued currency, which optimizes or best facilitates exchange, and (2) also serve as a lender of last resort in times of crisis in order to avoid banking/financial system collapse. In an interesting Wall Street Journal article last week, former Treasury Secretary George Shultz pointed out that the Fed’s view of what constitutes “normal” growth is also important. A Fed chief and Open Markets Committee group that feels 2% GDP growth is the new normal (rather than the longer-term average of 3%+) might be more aggressive in raising rates to slow the economy (for fear of inflation) than a group that believes 3% growth is doable. I thought that was an interesting point.