- Fed Chair Janet Yellen says the prospect of tax cuts has been built into Fed forecasts for some time, and the central bank does not expect a major boost to growth.
- Yellen said tax cuts were discussed by Fed members at this week’s meeting, which culminated in an interest rate increase.
The Federal Reserve raised interest rates on Wednesday and released a new batch of economic forecasts that very much reaffirm conventional wisdom among economists about the Republican tax cut plan: it will not do much to boost economic growth.
Despite claims by the Trump administration that the cuts, which most analyses view as skewed toward corporations and wealthy individuals, will boost growth, the Fed predicts that economic growth will benefit only marginally, if at all, from the tax cut plan.
Fed officials’ median forecast for 2018 growth did climb to 2.5% in December from 2.1% in September, and Yellen said the prospect of tax cuts are “a factor supporting this modestly stronger outlook.”
But she emphasised in the opening remarks of her press conference that many officials “noted uncertainty remains about the macroeconomic effects of measures that may be implemented.”
“Most of my colleagues factored in some fiscal stimulus,” Yellen said, but have done so throughout the year, meaning the forecast rise from September “should not be viewed as estimates of the tax package.”
The central bank’s forecasts are well below President Donald Trump’s 3% growth target, and flies in the face of claims that there would be sharp boosts to wage growth from the Congressional measures, which look increasingly likely to become law.
The Fed’s interest rate hike this week marks the fifth such increase since December 2015. Policymakers are forecasting another three rate increases next year, although concerns about low inflation, which has consistently undershot the central bank’s 2% target, give some market participants pause about that pace of rate increases.
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