Goldman Sees Rate Hikes Ahead as Slack Wrung Out of Labor Market

  • With tax cuts now signed, it’s Trump’s economy going forward
  • Fed’s been balancing positive growth news with weak inflation

Will the Fed Stay on Track? Here's How 2018 Might Pan Out

President Donald Trump’s tax cuts hand him ownership of wherever the U.S. economy turns starting in 2018, and at Goldman Sachs the view is that tighter monetary policy is ahead.

Whatever slack is left in the labor market is seen being eliminated in 2019, pushing the jobless rate to 3.3 percent, a level not seen in decades, according to a Goldman Sachs analysis, giving Trump’s new Federal Reserve chair a reason to raise rates.

Trump on Friday signed a $1.5 trillion tax-overhaul bill, delivering a major break to U.S. corporations and a package of temporary cuts to other businesses and most individuals. While the new legislation hasn’t scored well in national polls, Republicans say average Americans will embrace it when labor force participation increases and their paychecks rise.

See here: The Major Tax Changes in the Republican Bill

U.S. unemployment has dropped to 4.1 percent, its lowest level since 2000, and job openings are elevated. The Fed has started raising interest rates, and earlier this month stuck with projections for three hikes in 2018. 

With her final interest-rate decision as Fed chair, Janet Yellen continued seek a delicate balance between responding to positive news on growth and unemployment that encouraged gradual tightening, and signaling caution due to persistently weak inflation readings that have befuddled policy makers.

Jerome Powell, now a Fed governor, has been nominated to replace Yellen when her term expires in February.

“We expect that continued strong growth momentum will eliminate the few remaining pockets of slack and will push the other state economies further beyond full employment.,” Jan Hatzius, chief economist at Goldman Sachs, wrote in a client note released late Friday. This “should provide a steady impetus for further monetary policy tightening.”

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