Fed may have to cut rates if Trump can’t boost economy
The Federal Reserve didn’t raise interest rates on Wednesday, but it is still likely to do so at least one (if not two) more times this year.
Or so, Wall Street thinks.
But what happens if President Trump is not able to push any meaningful legislation through Congress this year?
In particular, if he’s unsuccessful in getting tax reform done, is there any chance the economy could keep growing at a healthy rate?
Or will the U.S. be doomed to another few quarters of sluggish and subpar growth like the meager 0.7% annualized rate that the economy put up in the first quarter?
It could be difficult, if not impossible, for the economy to rise anywhere near the 3% rate that many in the Trump administration are hoping for, without tax reform.
And it may be even more of a challenge to get to that level if Trump and Congress are unable to repeal and replace Obamacare, undo the Dodd-Frank financial reform laws, or pass a stimulus package that boosts infrastructure spending sometime this year.
Enter Janet Yellen.
The Fed chief might have to hop into a phone booth (assuming she can find one) and change into her Super Central Banker costume.
Bruce Bittles, chief investment strategist at Baird, argues that the Fed may need to slow down the pace of rate hikes in the event that Trump and Congress fail to do anything soon.
Bittles added that the Fed may even have to start cutting rates again if the economy suddenly loses steam.
The encouraging news though is that many consumers and businesses have expressed more confidence in the economy since Trump’s victory.
But the bad news is that these good economic vibrations aren’t giving people enough excitations to start buying more just yet.
The so-called soft data — readings about sentiment — are improving. But hard data, such as actual dollars spent, continue to lag.