In possible boon for White House, Fed ready to lay low as tax plan kicks in

By Howard Schneider and Jonathan Spicer

PHILADELPHIA (Reuters) – U.S. Federal Reserve policymakers have come to view Donald Trump’s tax overhaul as a short-term economic boost that will neither permanently supercharge the economy, as the president says, or cause an immediate disruption that would require a central bank response, as some analysts have warned.

That view emerged in recent interviews with four central bankers across the policy spectrum, from those eager to keep interest rates low, to those more inclined to raise rates as a guard against asset bubbles or any unexpected inflation jolt.

The interviews offer the most detailed look yet at a key issue — whether the changes in the tax code might prompt the Fed to raise rates more quickly and thus blunt the new law’s impact. The issue has divided analysts, with even staff at Congress’ Joint Committee on Taxation assuming an “aggressive” Fed reaction to the new law.

But all four of those interviewed by Reuters shared a common conclusion that the law would provide some short-term benefit without raising any near-term risks.

They predict that the combination of corporate and household tax cuts will raise growth by up to half a percentage point annually for the next couple of years, and help keep unemployment at near record lows and thus perhaps raise wages.

In addition, depending on how companies respond in terms of increased investment, the plan might raise long-run potential growth by a small amount.

What they do not see is any great risk that the tax stimulus will fuel inflation or a run-up in asset prices that would prompt the Fed to raise interest rates any faster than it already plans. Though not an endorsement of the legislation, it is an important sign the Fed will not stand in its way.

“I don’t feel any urgency to do something preemptively,” Federal Reserve Bank of Cleveland President Loretta Mester said in an interview with Reuters on the sidelines of the American Economic Association annual conference in Philadelphia.

Mester has been among those more inclined to lift rates from crisis-era levels, but sees no reason to rush because of the tax overhaul, which she predicts will raise annual growth as much as a half a percentage point for the next few years.

The Federal Reserve’s most recent economic projections forecast three interest rate rises in 2018. Market pricing currently indicates two.

Some private-sector economists recently penciled in four rises, partly because of the tax plan’s impact and…

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