With stock and property prices once again setting records, Jerome Powell may face some agonizing trade-offs
What if low inflation calls for low interest rates but those low interest rates make an eventual, destructive asset bust more likely? Should he lean against an incipient bubble by raising rates faster now, or plan to mop up the mess if assets collapse later?
.. no divine coincidence dictates that the same interest rate will achieve both 2% inflation and a stable financial system.
.. Before the global financial crisis, they concluded no: pre-emptively pricking bubbles seemed much riskier than letting them burst of their own accord. They are less dogmatic now.
.. In a 2015 speech, he said: “Tighter monetary policy might eventually be necessary” if dangerous risk-taking reappeared. A year ago, he went further: “The current extended period of very low nominal rates calls for a high degree of vigilance.”
The case for vigilance has only grown since.
The economy is on a sugar high, and tax cuts won’t help
Consensus expectations for 2018 are only marginally greater today than they were before the election.
.. The U.S. stock market has been very strong, rising by close to 25 percent since the election, which is far more than most observers expected a year ago. This appears to be heavily driven by increases in corporate profits. But performance is running behind that of Japan and Germany, belying the idea that the market is being driven by U.S.-specific policy factors.
.. If something fundamental had happened to improve the U.S. business environment, we would have seen capital inflows and an appreciating currency.
.. Even very innovative companies such as Apple and Google cannot find enough high-return investments and so choose to engage in large-scale share repurchases.
.. There will be no meaningful and sustained growth in workers’ take-home pay without successful measures both to raise productivity growth and to achieve greater equality. Only in this way can we achieve healthy growth.
.. The bipartisan Simpson-Bowles budget commission was surely not biased toward big government. Yet it concluded that the federal government needed a revenue base equal to 21 percent of gross domestic product. The tax-cut legislation now under consideration would leave the federal government with a revenue basis of 17 percent of GDP — a difference that works out to $1 trillion a year within the budget window... This will further starve already inadequate levels of public investment in infrastructure, human capital and science. It will likely mean further cuts in safety-net programs and cause more people to fall behind. And because it will also mean higher deficits and capital costs, it will likely crowd out as much private investment as it stimulates.
There Are No Good Reasons to Buy Stocks
If the market is to keep on rising, there will need to be new answers about why to buy
The big economic surprise of 2017 hasn’t been how good the U.S. economy is—it has grown moderately faster than last year—but how well the rest of the world has done. Barclays economists estimate global gross domestic product will advance 3.9% this year, better than last year’s 3.3% gain, and better than the 3.5% they forecast at the outset of the year. That helped profits at multinationals, in particular.
.. it is the early stages of an economic upswing, when demand is rising much faster than costs, that profits really boom.
Republicans Feel Triumph, Fear Tragedy
Tax plan, Mueller’s Russia probe help produce two potential divergent paths
.. The Republican establishment’s bargain with Mr. Trump always has been essentially this: It is worth putting up with his excesses and an undercurrent of mutual mistrust because ultimately he would promote and then sign the Republicans’ long-sought tax cut.
.. Republican plans to make Democratic House leader Nancy Pelosi rather than Mr. Trump the unpopular face of the election year succeed... Trump voters decide the party and the president they supported in 2016 don’t share their common-sense aversion to running up big bills and leaving them for the kids... Meantime, a failure to agree on a new spending bill forces a government shutdown just before Christmas, and the GOP fails to put the blame off on Democrats. That instantly sullies Republicans’ newfound reputation for governing effectively... Corporate leaders don’t make the kinds of job-creating investments Republicans predict. Meanwhile, the tax cut’s stimulative effect overheats an economy already near full employment, pumps up an overextended stock market and compels the Fed to keep raising interest rates. The bubble bursts.The Obamacare infrastructure also collapses in 2018, and Republicans now are the party bearing the blame for health-market chaos.
.. Trump world financial entanglements with Russians gave the Kremlin leverage over the eventual president, and it’s shown Mr. Trump obstructed justice to stop investigators from finding out.