As the US tax bill passes its way through Congress and the Senate, eyes are also on interest rates. Will this bill result in an interest rate increase? Treasury yields took a step upwards Tuesday, so is there a connection between that and the proposed new tax rates?
The situation at this year end could provide an insight into what awaits us in 2018. On Tuesday, the S&P 500 slipped 8 points to 2,681 and the Dow Jones dropped to 24,754 – 37 points down.
Effect of US Tax Bill: May Result in a Deficit or Even Inflation
Inflation in the US is a distinct possibility, but by no means certain. It is expected that the new tax rates will be approved by both Congress and Senate today, Wednesday. Many believe that this would result in increased economic growth in the US. It may also result in an increased deficit. Each of these outcomes can drive yields upwards. Inflation is a possible outcome of all of this.
Drop in Quantitative Easing
Many analysts and strategists believe that next year there will be a drop in quantitative easing by central banks worldwide. It has been said that the Federal Reserve is to begin cutting back $10 billion on bond purchases in January. This would result in a monthly $20 billion drop in bond purchases. The European Central Bank is assuming a similar policy. It will be reducing its monthly bond purchases by a staggering 50% to $35 billion.
Liquidity and Fed Interest Rate Policy
Liquidity from December 2017 to January 2018 will have dropped by $55 billion. Imagine the total reduction in liquidity over 2018! We will wait and see what the results of the new tax law will be if it is passed as it likely will be. Jerome Powell takes over from Janet Yellen in February. Only then will we have an idea of the Fed’s approach to interest rates. Three increases are forecast for 2018. The ultimate effects of the new tax bill have yet to be seen.
