Impasse a blessing for FOMC
As the Trump agenda is at present under the cloud of the stalled healthcare reform, there is not yet any reason to believe the stronger growth that can very likely bring higher inflation is imminent. While it might seem a bit perverse, the U.S. healthcare reform impasse is therefore of huge benefit to the Fed and Chair Yellen who want to remain more circumspect right now.
Lacking a definitive dynamic for stronger future U.S. economic growth which is contingent on the extent of tax reform, the Fed can remain more circumspect without appearing to be behind the curve on any inflation anticipation. In fact, when specifically asked by CNBC’s Steve Liesman at Wednesday’s press conference whether the Trump tax and regulatory changes had even been discussed, Yellen’s answer was “No.” That is based on the still indeterminate “timing, size and character” of any actual reforms.
Of course as also noted in our March 10th OECD versus ADP post, the more major tax reform that could be a real tonic for the U.S. (and global) economy remains contingent on the completion (or at least clear budgetary parameters) of the healthcare reform. That compounding factor on the lack of progress on healthcare reform is the much greater complexity than the Trump administration expected.
This is a real stumbling block as the administration attempts to sell it to skeptical conservatives and moderates. Just one point is the difference in even Republican states where some governors expanded Medicaid and other refused. The real problem is…
Equities might get stale again
All of the U.S. equities euphorias over the Fed seeming more gradualist than some had feared is once again based on the U.S. economy remaining weaker than many are expecting under the full Trump reform agenda. While the Fed Chair was indeed upbeat about the encouraging signs like former business investment and nearing the Fed’s employment goals, she still indicated a very moderate level of growth.
And that is inconsistent with the current anticipatory levels the U.S. equities have achieved on far better corporate earnings assumptions. And as far as any corporate earnings improvement goes, even if that transpires under whatever degree of reforms are actually implemented, the real impetus for higher growth is personal income and spending. Especially under the current circumstance that looks less likely, especially if the current healthcare reform effort drags on much longer… which may weigh on equities again.
What Chair Yellen actually said
In the second case the Fed Chair confirmed that current projections are consistent with a lack of actual fiscal changes based on the Trump agenda, and as such, the Fed remains as ‘data dependent’ as previous. While she did not volunteer this as she (and various previous FOMC statements) had done before, there was a telling question from Bloomberg’s Kathleen Hayes near the end of the press conference.
After quite a few questions regarding whether the Fed might be behind the curve of the Trump agenda become reality and need to become more aggressive, Hayes was clever enough to inquire on the contrary.
She specifically cited the lack of productivity gains and attendant weak wage growth to point out that the real drivers for future inflation may be less pronounced than the current anticipatory psychology suggests. Please refer back to the opening graph for a clear view of its key indications.