The biggest news of last week is what did not happen. The Trump administration rolled out its tax plan, and markets ignored it.
The plan has expanded from one page last spring to nine pages but is still just a list of principles, not detail. Markets did not react partly because there was nothing new, but largely because it is inconceivable that all of the principles as presented will pass into law, and no way to know what mix, if any will be enacted and to what economic effect.
The 10-year T-note has bounced up off a recurrent bottom, but is still within many-month bounds.
Last fall, markets instantly after the election leapt into the Trump Trade. Fool us once, not twice. The betting line on the tax proposal goes like this: A limited deal has a good chance, if only because giving away money is irresistible in Congress.
Only two aspects would both have a decent chance of passage and significant economic effect: raising the basic deduction will have bi-partisan appeal, as will the ol’ snake oil that tax cuts will produce stimulus and deficit-closing tax revenue.
Yellen’s speech did move the telltale 2-year T-note, now pricing-in a December hike from 1.25% to 1.50%. Note that the dollar has rebounded accordingly.
Any other mixture of new tax law will resemble the F-111 fighter designed in the 1960s, intended to fulfill all missions for all services, but missed all so badly that its nickname was the anti-heroic “Aardvark.”
Economic data are now polluted by hurricane damage and response, but one piece fairly shouted: August core PCE (personal consumption expenditures) inflation year-over-year fell again, from 1.4 percent to 1.3 percent and further confounded Fed forecasts. That slide may give impetus to deficit-spenders, although the Fed’s inevitable reaction to deficit stimulus will be to lean against it.
This week Janet Yellen opened a window for all to see exactly what she and the Fed are thinking, how and why. She does not have the telegenic power of her predecessors, but more than makes up for the absence by her direct honesty. Her speech this week is in short and readable English, just six pages.
The equations appended to the speech are intelligible only to a Ph.D. — not to show off, not her style — but to keep her colleagues disciplined, and to show anyone else how deadly serious the Fed’s deliberations are. One example:
The ECI is central to the Fed’s predicament: analysis established for more than a half-century has recently failed to predict inflation. Another ECI chart, below, illustrates the extreme importance of the failure.
Yellen is so straight that she put the problem in the most plain English: “As I will discuss, this low inflation likely reflects factors whose influence should fade over time. But as I will also discuss, many uncertainties attend this assessment, and downward pressures on inflation could prove to be unexpectedly persistent. My colleagues and I may have misjudged the strength of the labor market, the degree to which longer-run inflation expectations are consistent with our inflation objective, or even the fundamental forces driving inflation.”
In the near term, stick with Yellen. If the PCE measure of inflation is correct and stable (probably the former, not the latter), the Fed has only now gotten the cost of money up to the most conservative rate of inflation. That is stimulative policy any time, any place. To continue very gradual increases is just a sensible insurance policy. The term, “tightening” does not apply — nowhere in the credit system have terms or availability become tighter.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
