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Michael Brandl > Macro Updates > Archives > June 1, 2003 November 13, 2004 Fed interest rate hike: a good move. This week the Federal Reserve’s Open Market Committee raise its target for the Fed Funds Rate a quarter of a point to 2%. This is the fourth time in six months the Fed has raised rates. But since inflation is running at about 1.5%, this means the real Fed Funds rate is still at a skimpy one half of a percent! So what to make of the Fed rate increase? Yes, it will increase borrowing costs of firms and households and that might have a dampening effect in some markets. On the other hand, if you look at the overall U.S. economy it can be argued that the rate increase was the right move at the right time. The U.S. economy continues to gain strength, despite volatile energy prices and wacky exchange rate markets. Take a look at retail sales: year-on-year up 7.6% when you take out auto sales, the year-on-year figure is up 8.5%. The Commerce Department reports that business inventories are also signaling an expanding economy. And of course, there are the jobs figures: October initial report shows creation of 337,000, the biggest gain in seven months. The August and September figures were also revised upward. So the Fed really didn’t have much choice. It sees the raising of the rates as a “neutral move,” not trying to stimulate the economy nor slow it down. The raise in rates was seen as trying to get things back to normal, if you will. So the future looks pretty good. Ceteris paribus, of course.
Bush II . What will the second Bush Administration bring in terms of economic policies? Good question...who knows? One of the interesting things they are talking about is “tax reform.” In the past this has meant minor changes in tax laws, nothing really that interesting. But this time it could be very different. Some are saying the Bush Administration is going to push of the elimination of the Federal Income Tax and along with it, the IRS.The idea is to replace the Federal Income Tax with a national consumption tax (think national sales tax). The idea is to encourage savings and investment as well cut down on tax evasion. People in the lower end of the socio-economy ladder would receive reimbursements so the tax would not be regressive. There are major problem with the current income tax system. It truly needs fixing, this proposed plan is one way to go about it. Sounds like an interesting idea…but…it would mean government and municipal bonds would loose their preferred status (read: lower borrowing costs) as being tax exempt. So, watch for these groups to object strenuously to any talk about elimination of Federal Income Tax. This will probably play out similar to the Bush Administrations goal of eliminating the Capital Gains Tax. Sound economic policy, politically impossible to pull off, so they settle for some type of “change.” The change in the Federal Income Tax will probably wind up being a movement to a Flat Tax with the elimination of most deductions, including the home interest tax deduction. But then again, you never know about Washington. Regards, MB |
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