White House Doesn't See Need for Faster Fed HikesBy
Hassett says supply side stimulus won’t spur higher inflation
Fed officials give differing views of tax plan’s impact
The Federal Reserve won’t need to pick up the pace of its planned interest-rate increases in response to the recently-passed tax overhaul package, White House chief economist Kevin Hassett said.
The administration’s computer modeling of the economic effects of the tax plan result in interest rates that “aren’t inconsistent with the Fed’s current guidance,’’ he said during a Jan. 6 session at the annual meeting of the American Economic Association in Philadelphia.
U.S. central bankers in December penciled in three interest-rate increases for this year, the same pace they foresaw in September, even as they raised their forecast of 2018 economic growth to 2.5 percent from 2.1 percent in anticipation of the $1.5 trillion cut in business and household taxes, based on their median projections. President Donald Trump signed the tax bill into law on Dec. 22.
“If you have a supply side stimulus then it doesn’t put upward pressure on prices’’ and so doesn’t require a change in the Fed’s policy path, Hassett said.
While there’s some boost to demand from the plan, primarily through household tax breaks, the lower corporate tax rate should pave the way for higher potential growth by encouraging companies to spend more on productivity-enhancing plant and equipment, Hassett said, echoing comments he made in a Nov. 16 Bloomberg interview.
The White House economist also pointed to the tepid level of inflation, which is below the Fed’s 2 percent target, in suggesting that the tax cuts would not lead to a faster pace of central bank rate increases.
Monetary policy makers attending the annual economists’ meeting provided differing views of the tax plan and its potential impact on the economy and monetary policy.
James Bullard, president of the Federal Reserve Bank of St. Louis, said he wouldn’t be surprised if the tax reforms yielded a longer-term payoff for the economy.
‘Light a Fire’
“There is some possibility this could light a fire under investment and really drive growth higher,” Bullard, a policy dove who’s argued against raising rates, said in an interview on Bloomberg Television with Michael McKee on Jan. 5. “I have some sympathy for this idea you would get this investment boom coming out of this tax policy.”
While Bullard said that thus far, he hadn’t changed his call for the Fed to keep rates on hold for now, “if that happens I would certainly take note of that and adjust policy appropriately.”
Federal Reserve Bank of Philadelphia President Patrick Harker, in contrast, said he didn’t expect the package of tax cuts to have a large impact on economic growth.
In remarks on Jan. 5 at the AEA meeting, Harker also revealed a dovish rate call for 2018: two hikes, versus the median Fed estimate from December of three increases, because inflation was low and he was concerned by the risk of inverting the yield curve.
Several private economists attending the Philadelphia meeting said they didn’t expect the tax package to have a big impact on the Fed’s monetary policy trajectory.
While the central bank will need to keep watch on the demand-side effects of the tax cuts, “I wouldn’t see much need for the Fed to do anything different” than already planned, said Glenn Hubbard, who served as head of the Council of Economic Advisers under President George W. Bush.
“The only thing it might say to the Fed is that it’s OK to keep’’ raising rates, said Hubbard, who’s now a professor at Columbia University in New York.
Former Bank of England policy maker Kristin Forbes said the Fed would probably have to pick up the pace of its rate hikes. but added that any speed-up would be from what has been a historically very slow tightening campaign.
The “pace might accelerate a bit but it doesn’t mean we’re pushing any rate hikes into an uncharted, much faster territory,’’ Forbes, who’s now a professor at the Massachusetts Institute of Technology, said at the economists’ annual meeting.
“If anything, it might make the Fed a bit more comfortable continuing on its path of rate increases and getting back to some semblance of normal,’’ she added.
— With assistance by Jeanna Smialek, and Christopher Condon