Fed upgrade post US tax cuts

Federal Reserve upgrades post US tax cuts

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The Federal Reserve's economic outlook predicts a rise in US GDP and a fall in unemployment levels as a result of the tax cuts.

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On March 21, the United States Federal Reserve (Fed) released its updated Quarterly Summary of Economic Projections. These estimates include things like forecasts for GDP, unemployment and inflation.

Given all of this economic analysis is to assist the Fed in making decisions on interest rates, the Fed also publishes its own estimates of where it expects interest rates to be over coming years. 

Justin Still

Justin Still

The Fed’s outlook has changed markedly over the past few months. The major economic event that has occurred over this time is the US tax cuts. It therefore seems reasonable to assume that this is the Federal Reserve’s initial estimate of the impact that these tax cuts will have on the US economy. 

The major changes in the Fed's economic outlook are the predicted rise in US GDP and the fall in unemployment levels (as a result of the tax cuts).  These improvements are gained with only negligible increases in forecast inflation levels, which is welcome news for investors. 

What makes this interesting is that much of the US mainstream media has recently been claiming the tax cuts were provided too late in the cycle, when cyclical measures of excess resources like unemployment were too low.

The question is why are they wrong this time? Perhaps more importantly, what does the Fed think? 

The answer to this came when the incoming Chairman of the Federal Reserve, Jay Powell, stated that the average level of US productivity in the past six years was well below the longer term average.

In economic terms, the tax cuts will have the effect of increasing aggregate supply. Powell said he thought that the ability to accelerate tax write offs on new investment expenditure in the tax legislation, could increase investment and productivity.

This means that more output could be achieved per person employed. He also thought that cuts in personal taxes, as part of the legislation, could have the effect of increasing labour force participation. 

More people might come forward to work for the same total wage, because with the tax cuts, take-home pay had risen. This means that it was possible to achieve a lower sustained level of unemployment in both the short and long term with little increase in US inflation. Powell noted that US growth is driven by productivity and labour force participation. 

Overall, the Fed’s update suggests a brighter outlook for the US economy and labour market with little rise in inflation. Markets of late have been quick to react negatively to the fear of inflation.

It will be interesting to see how this all plays during the course of this year, as many market participants believe that potentially rising interest rates due to rising inflation is the biggest risk to markets. 

  • Justin Still, Investment Adviser (Authorised Representative: 000279726) Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410 

The story Fed upgrade post US tax cuts first appeared on Queensland Country Life.

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