03.11 Weekly Viewpoint : United States: progress being made on the tax reform front, while Trump names Powell new Fed Chairman.

Many vacant seats on the Federal Reserve Board still to be filled……..

United Kingdom: the Bank of England as well, after implementing the first interest rate hike since the financial crisis, has signalled that monetary tightening will proceed at a very cautious pace, and that normalisation will only be partial.

Progress is being made in the United States on the tax reform front: the Republicans have unveiled their bill, which will be examined by the competent House Committees starting next week. The Senate bill is expected to be presented in the next few days, so that negotiations may start to seek an agreement on a joint bill to be approved by the end of November. The proposal is centred on a significant reduction in the number of tax rates applied to businesses, balanced in part by the abolishment of deductions and transfers. The personal income tax system will be simplified, with a reduction in the number of brackets and a raising of the maximum tax rate threshold, although many deductions will be abolished. The reform also provides for a gradual abolishment of the inheritance tax and of the Alternative Minimum Tax. The fiscal reform is estimated to have a negative impact on the federal deficit worth 1,500 billion dollars over the next decade, and the first effects will become visible already in 2018 if, as seems likely, the bill is approved by the end of the year.

In naming the new Chairman of the Federal Reserve, the Trump administration has opted for caution and continuity. The chosen candidate is Jerome Powell, a member of the board since 2012, and a reassuring figure for the markets, as in the past few years he has always voted in line with Yellen. However, Yellen could now opt to resign early from her seat on the board, to speed up the transition period. As a result, the board would be reduced to only three members, of which only one (Brainard) with a PhD in economics. Therefore, the four vacant seats will presumably be assigned to economists. For the time being, the list of possible candidates includes much less dovish names than those which have made up the majority of the Board over the past decade. Furthermore, it is hard say now to what extent Powell will be able to exercise leadership on monetary policy issues. Therefore, it is premature to speculate on how the Fed’s strategy could be influenced by the forthcoming appointments, which will result in an upheaval of the central bank’s decision-making bodies.

The first rate hike by the Bank of England since the outbreak of the financial crisis, from 0.25% to 0.50%, was accompanied by extremely cautious indications on the future course of monetary policy: the central bank has signalled that it expects to increase rates only twice again in the next three years. As a result, sterling further deepened its correction from the highs hit last September. All the central banks are moving very cautiously in removing monetary stimulus, helped by the absence of inflation pressures and by the moderate credit trend. In the United Kingdom’s case, additional uncertainty is tied to the negotiations on the country’s exit from the European Union, which are failing to make decisive progress, and are balancing stronger inflation pressures than in the other advanced countries. There is no reason to believe that the central banks will change their approach in the next few months


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