The failure of the GOP Healthcare Bill implies that President Trump and the Republican-led Congress may not be as successful in implementing their ambitious agenda. So what effect will this have on the Federal Reserve System and the economic outlook for the US? In this podcast, Mark Doms, Senior Economist at Nomura uncovers how our history can teach us a thing or two.
During his campaign, President Trump laid out an ambitious agenda for economic policy. It included unconventional policies such as significant new restrictions on trade and immigration. It also included plans for significant tax reductions and a major infrastructure initiative. In the wake of the election, business and consumer sentiment improved notably, as did equity prices. After six years of gridlock, the market consensus seemed to be that President Trump, with the support of Republican majorities in both houses of Congress, would be able to get a lot done.
But that might not now be the case, and here’s why:
Congress is divided and polarized. Over time the republicans have drifted right and the democrats have drifted left, eliminating the middle ground. Further, within the republican caucus, a tremendous of diversity remains. Together these two facts imply that getting agreement will be challenging.
When taxes were cut significantly in the past, the fiscal outlook was much brighter, with debt/GDP ratios expected to decline. Currently, deficits and the debt/GDP are expected to increase significantly over the next 10 years.
Another factor limiting the outlook for large tax cuts is the economic outlook. The economy is expected to improve, limiting the rationale for large tax cuts.
The final decisions on taxes and spending won’t likely take place until next fall.