Aviva Investors’ senior economist Michael Grady considers five issues of Donald Trump’s presidency for 2018.
Tax reform has been the most eagerly anticipated of Trump’s campaign initiatives. The tax reform bills drafted by Republican House and Senate leaders include many items from Trump’s wish list: lower corporate taxes and simplified tax brackets for individuals, for example.
Many of the proposed reform provisions would affect US businesses, including a one-time repatriation of foreign-held profits, a move to a territorial taxation system, and limitations on the tax deductibility of interest payments.
Revised rules on foreign profits would encourage US businesses to use these earnings for capital investments or acquisitions. The change in interest deductibility would make debt issuance less attractive for some companies and alter the dynamics of the US corporate bond market.
The President wants a bill to implement these reforms before year-end, but the legislation is complicated, opposed by some of the industries it will affect and has yet to pass through the Senate. Still, markets may have swung too far in unwinding the “Trump trade” and are underpricing the likelihood of tax reform becoming law. Even if eventual reform is modest, it could still carry some upside potential for markets.
Trump’s trade policies gained significant electoral support among working class Americans. His early actions on existing trade agreements, such as withdrawing the US from the Trans-Pacific Partnership (TPP), showcased his anti-globalist credentials.
However, on his Asian visit in November, he blamed previous US administrations rather than China for the widening trade gap between the two countries, then reverted to protectionist themes when addressing the broader Asia Pacific Economic Cooperation forum.
It remains to be seen how Trump’s decisions and actions will play out as the administration’s trade policy evolves. US tariffs on South Korean washing machines and British and Canadian passenger jets might play well domestically, but could complicate ongoing relations with key US trading partners.
Significantly, there are US business and political interests, including inside Trump’s own party, that favour free trade and would attempt to scuttle any purely protectionist measures.
Financial services deregulation
Trump enjoys the power of the pen and has used it willingly to revise or reverse a wide range of regulations without needing to involve Congress. Much of this deregulation is done to preserve or create American jobs. One focus has been on unwinding some of the regulations on the financial sector that came into effect after the 2007-09 Global Financial Crisis.
While many of these rules were understandable in response to the banking meltdown, even well-intentioned regulation can hamper financial markets from functioning effectively. It appears as if the industry is at a high-water mark in terms of regulation.
Federal Reserve appointments
President Trump has an opportunity uncommon for most US presidents to shape the future of US monetary policy, by filling number of vacancies on the Fed’s seven-member Board of Governors and naming a new Fed chair, Jerome Powell, a current Fed governor and known centrist on monetary policy, nominated by Trump in November to replace Janet Yellen.
From a longer-term perspective, Trump may be keen to mould a Federal Reserve board that would be more supportive of faster economic growth and maintenance of an accommodative stance toward monetary policy.”
Elections for all 435 representatives in the US House and 33 US senators will be hotly watched in November 2018. Republicans currently have a 46-vote advantage in the House and a four-vote advantage in the Senate.
It would seem the greater risk to the GOP Congressional hegemony would come in the Senate, but Democrats in the upper house face the harder road; even with the recently announced retirements of two GOP senators, more incumbent Democratic senators than Republicans are up for re-election in 2018.
Ultimately, the tax reform bill must pass through the Senate and be reconciled with the version approved by the House. This will be key to many incumbent lawmakers’ re-election prospects.