Fed, wary of inflation, could lean against Trump tax cut

[DonViejo]

Source: Reuters



Wed Apr 26, 2017 | 5:08pm EDT

By Howard Schneider | WASHINGTON

President Donald Trump's plan to slash business and household taxes could shift the U.S. economy into higher gear, but it may have one effect the White House would not welcome - interest rates ratcheted higher than expected by a wary central bank.

The Trump administration says hundreds of billions of dollars fed into the economy via deep cuts in business taxes and more generous exemptions for individuals will unleash a wave of investment and make the U.S. economy more competitive than ever. But the plan, if approved in the form Trump officials outlined on Wednesday, could add inflationary fuel to an economy already running near full capacity, a risk Federal Reserve officials have been warning about since Trump got elected.

Confronted with the prospect of massive cuts that would slash the corporate tax rate to 15 percent from 35 percent and overhaul the personal tax code, Fed officials will need to start debating if they can maintain a measured pace of rate hikes or they might need to move faster, say analysts and economists who follow the U.S. central bank.

The Fed aims to hold inflation at around 2 percent, and is close to that threshold, with its target short term rate expected to rise two more times, to about 1.5 percentage points, by the end of the year.

Read more: http://www.reuters.com/article/us-usa-fed-trump-idUSKBN17S2X1

[Nitram]

1. The Fed has no authority over the issue of tax policy.

[Massacure]

2. Indeed they do not

But they have authority to set the federal funds rate and were instructed by Congress to do it in such a way to maximize employment and stabilize prices. If they view large tax cuts as an inflation risk, that may tip the scales toward raising interest rates.