Tax Legislation Takes Center Stage; Data Suggest Plenty of Momentum Already

The focus of policymaker comments turned to tax reform and the pace of rate hikes in 2018 as a rate hike next week looked more and more like a foregone conclusion. The progress on the Senate’s tax bill was a topic of interest. Dudley said now is “probably not the best time” for fiscal stimulus: “It would be a reasonable question to ask, is this the best time to apply fiscal stimulus, when the economy’s already close to full employment?” It appeared that tax reform posed upside risk to his forecast: “If I were to judge that the tax-cut package would push the economy along very rapidly without raising the productive capacity of the economy, then that would obviously factor into my own thinking on monetary policy.” Dudley also warned, “I’m a little surprised that markets aren’t at all concerned about sustainability.” Kaplan saw a “short-term bump” from a tax bill. He said, “My concern is with other elements of this package that are clearly a tax cut, short-term stimulus, which I think will create a little bit of a bump in GDP.” He also saw the side effect of higher leverage as a consequence. Nonetheless, he saw the neutral funds rate being “likely in the neighborhood of 2.5 percent.” Bullard saw tax legislation as potentially boosting productivity: “Hopefully we can get some additional growth out of it. That would not have any immediate implications for monetary policy in my view.” Mester factored a bit of fiscal stimulus into her forecast. Other policymakers were still waiting for the finalized details before incorporating it into their forecasts. Williams warned “it’s very hard to know what exactly a tax plan is until it’s been finalized.” He disclosed that he saw three hikes next year as a base case. Harker appeared to moderate his anticipated pace of rate hikes: “I’m still supportive of a December increase, but I think next year we’re going to have to wait and see.”