Last month, Janet Yellen handed over the reins to Jerome Powell. He was initiated as Fed Chair into a chaotic market, as the US markets corrected sharply in his first week. There has been much speculation as to what kind of Chair Powell would make. On one hand, he’s seen as Trump’s man and on the other, his stance seems to mirror Yellen’s.
On the surface, the US labour market is near full capacity yet, inflation is below the 2% target, and economic growth is picking up. All this, despite the Fed unwinding its balance sheet and raising interest rates. But all is not rosy. Although unemployment is low, wage growth is yet to pick up. This could be potentially disastrous if inflation spikes (through government spending) or interest rates are continuously raised. Higher rates would put more strain on borrowers. Rising inflation without wage growth would make people poorer. Considering this, Powell has opted to follow a cautious approach to raising interest rates and will stick to the earlier target of three rate hikes this year.
The intention of the $1.5 Trillion tax cut is to promote economic growth. The near-term impact on growth is higher than previously anticipated. When it comes to policy, every action has its associated cost. The tax break automatically lowers government revenues. Decreased revenue will translate into higher fiscal deficit. Expenses towards Medicare, Medicaid and Social Security will widen the deficit. Yellen previously highlighted America’s debt as an area of concern, and a wider deficit will only add to it. A more optimistic theory believes that the economic growth will offset the deficit.
So far, Powell has proved to be cautious and is sticking to the plan.