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Insight: In possible boon for White House, Fed ready to lay low as tax plan kicks in

Reuters  |  PHILADELPHIA 

By and Jonathan Spicer

(Reuters) - policymakers have come to view Donald Trump's overhaul as a short-term economic boost that will neither permanently supercharge the economy, as the says, or cause an immediate disruption that would require a central response, as some analysts have warned.

That view emerged in recent interviews with four central bankers across the policy spectrum, from those eager to keep interest rates low, to those more inclined to raise rates as a against asset bubbles or any unexpected inflation jolt.

The interviews offer the most detailed look yet at a key issue -- whether the changes in the code might prompt the to raise rates more quickly and thus blunt the new law's impact. The issue has divided analysts, with even staff at assuming an "aggressive" reaction to the new law.

But all four of those interviewed by shared a common conclusion that the law would provide some short-term benefit without raising any near-term risks.

They predict that the combination of corporate and household cuts will raise growth by up to half a percentage point annually for the next couple of years, and help keep unemployment at near record lows and thus perhaps raise wages.

In addition, depending on how companies respond in terms of increased investment, the plan might raise long-run potential growth by a small amount.

What they do not see is any great risk that the stimulus will fuel inflation or a run-up in asset prices that would prompt the to raise interest rates any faster than it already plans. Though not an endorsement of the legislation, it is an important sign the will not stand in its way.

"I don't feel any urgency to do something preemptively," Federal Reserve of Cleveland said in an interview with on the sidelines of the annual conference in

Mester has been among those more inclined to lift rates from crisis-era levels, but sees no reason to rush because of the overhaul, which she predicts will raise annual growth as much as a half a percentage point for the next few years.

The Federal Reserve's most recent economic projections forecast three interest rate rises in 2018.

Market pricing currently indicates two.

Some private-sector economists recently penciled in four rises, partly because of the plan's impact and how it might affect the

Central bankers, however, seem poised to stick with their current plans, confident that inflation will stay tame and that the recent record run on U. S. stock markets is largely the result of economic fundamentals, not dangerous speculation.

The view is not universal, with some officials cautioning that the corporate cut in particular may be funneled into share buybacks or other financial maneuvers that could drive asset prices to unreasonable levels. The increase in the deficit is also a long-term concern.

But the overall wait-and-see stance was implicit in the policy statement and economic projections the issued in December after it raised its target interest rate.

Policymakers upped their forecast for economic growth at the time but held steady their expectation on rate rises.

NEW CHAIR

The cuts will kick in just as the Federal Reserve transitions to a new leadership, with former taking over from Janet Yellen, who over four years as focused on lowering the jobless rate in hopes of healing household finances after the 2007-2009 financial crisis and recession.

With the fiscal stimulus, some policymakers say the unemployment rate could now drop as low as 3.5 percent next year, in what World said amounts to an important "experiment" in determining just how low unemployment can go in a post-crisis, low-inflation world.

"The balance of risks right now suggests that it would be a good idea to experiment with pushing employment a lot harder," Romer said in

The unemployment rate is currently 4.1 percent, well below the 4.5 percent to 5 percent level that standard economic models say should lead to higher inflation. But so far, inflation remains tame.

"We keep our powder dry," said Patrick Harker, who, far from accelerating the pace of rate hikes, on Friday indicated he was ready to slow them down because wage growth remained weak.

CONSUMER PULL OR INVESTMENT PUSH

The cuts are split between a deep reduction to 21 percent on corporate profits, changes in the personal income that will shave what many households pay, and an increase in the value of the child credit, among other changes.

How that affects the economy will depend on the degree to which it fuels consumption by putting more money in people's pockets, versus "supply side" changes that could cause companies to invest more as a result of the lower rates.

Policymakers like and of the San Francisco said in interviews those changes would raise short-term growth and could possibly raise longer-term potential - though not by as much as the expects.

"You're doing it in an environment where you have very low inflation already so you probably don't have to worry as much about the monetary policy push-back that you would get in some other environments," Williams told

Bullard noted the cut "is actually not that big in the big scheme," parceling out to about $150 billion a year in a more than $18 trillion economy.

The more important effect, he said, may only become apparent over the long term if it does in fact raise potential, or "trend," growth. If that happens by increasing productivity, for example, and compounding over time, "even a couple tenths means a lot," he said.

(Reporting by and Jonathan Spicer; Editing by Lisa Shumaker)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Mon, January 08 2018. 08:31 IST
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