President-elect Trump’s tax and spending plans should give the U.S. economy just the jump-start it needs.
The World Bank reported in its latest outlook on the global economy, that Trump’s economic policies could boost the U.S. GDP growth by roughly 3% in 2018. “Moderate recovery” is expected for this year with the growth rate forecast to increase to 2.7%.
“The new administration has put forward a corporate tax cut, a cut in personal income taxes, especially for the wealthy, a reduction in the number of tax brackets and changes to the structure of deductions. The estimates depend on the timing of the cut, the reaction by the Federal Reserve and how businesses and households respond,” writes MarketWatch.
However, the report also said Trump’s policy initiatives and his plans to renegotiate trade agreements “could be detrimental to U.S. and global activity.”
But, it’s really too soon to tell since it is uncertain how these deals will turn out.
If the growth does in fact accelerate, Fed officials are planning to raise interest rates.
“While the Fed signaled that it would likely respond to expansionary fiscal policies with a faster pace of rate hikes, the Fed believes it is too early to embed this into its baseline,” wrote Michael Gapen, chief U.S. economist at Barclays following the Fed’s mid-December meeting. “Any real shift in the stance of monetary policy will require more clarity on the stance of fiscal policy.”
The Feds are also expecting the economy to grow faster in 2017 and Janet L. Yellen, the Fed chairwoman predicted in December that the rate would rise three times this year.
“Participants emphasized their uncertainty about the timing, size and composition of any future fiscal and other economic policy initiatives as well as about how those policies might affect aggregate demand and supply,” according to the Fed’s meeting minutes.
Experts are wary about creating a fiscal stimulus through tax cuts and by increasing spending.
“Ms. Yellen has warned that fiscal stimulus, like a tax cut or a spending increase, could increase economic growth to an unsustainable pace in the near term, resulting in increased inflation. The Fed quite likely would seek to offset such policies by raising interest rates more quickly,” writes the New York Times.
But, Fed officials do remain mostly optimistic about Trump’s election. “Some contacts thought that their businesses could benefit from possible changes in federal spending, tax and regulatory policies,” according to the Fed’s meeting minutes.
Nonetheless, if Trump does follow through with his promise of cutting the corporate income-tax rate from 35% to 15%, while also slashing individual rates, this is bound to inspire economic growth.
“When you have this combination of tax cuts, you have a positive outcome on investment and personal consumption,” said Ayhan Kose, director of the bank’s Development Prospects Group in an interview.