Federal Reserve Gives Trump Tax Cuts A Green Light

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The Federal Reserve stuck to script on Wednesday, raising its key overnight lending rate and maintaining a projection of three more rate hikes in 2018. Fed policymakers, including chief Janet Yellen, didn't wave red flags over Trump tax cuts being finalized in Congress.

[ibd-display-video id=3017205 width=50 float=left autostart=true] The good news is that Fed policymakers, factoring in imminent tax cuts, boosted their projection of 2018 economic growth to 2.5% from September's 2.1% forecast without increasing inflation estimates. That signals they expect the economy to pick up speed without causing monetary policymakers to hit the brakes.

Ahead of the news, shares of Apple ( AAPL ) and Caterpillar ( CAT ) helped push the S&P 500 index and Dow Jones industrial average into record territory on the stock market today , thanks to Republican momentum toward finalizing tax legislation and a benign inflation report.

Stocks got a lift as policymakers kept all signs of hawkish talons out of view, but gains faded heading into the close.

The S&P 500 index closed fractionally lower. The Dow industrials rose 0.3% and the Nasdaq composite 0.2%, off intraday highs after the Fed decision and Yellen's final quarterly press conference.

Bank of America ( BAC ) and JPMorgan Chase ( JPM ) saw slim losses after core consumer prices came in cooler than expected, rising just 1.7% from a year ago. JPMorgan and Bank of America fell a bit more after the Fed decision, trading down 1.25% and 1.6%.

Net interest margins of Bank of America, JPMorgan Chase and the rest of the banking sector are pinched when the gap between short-term interest rates and long-term rates narrows, and that's what happens when markets worry that the Fed is being too aggressive in raising rates.

After the Fed announcement, 10-year Treasury yields slipped further.

Fed Chair Janet Yellen noted that while tax cuts are likely to boost demand in the economy, she also expects a lower corporate rate and tax incentives for investment to boost supply and, potentially, productivity, curbing their inflationary impact.

Yellen did raise a longer-term concern about tax cuts adding to U.S. public debt, "taking what is already a significant problem and making it worse." She added that Congress may have less "fiscal space" for stimulus to help lift the economy out of future recessions.

Yellen also touched on Bitcoin, noting that it is not a "stable asset." Bitcoin futures were already down sharply Wednesday.

The Labor Department reported early Wednesday that overall consumer prices rose 2.2% from a year ago in November, as expected, amid higher energy prices. Meanwhile, prices for food consumed at home slipped 0.1% on the month, continuing the weak stretch that began in August as ( AMZN ) closed its Whole Foods acquisition by slashing some prices.

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Historically tame health care price increases also have helped curtail overall inflation. Prices of medical commodities, such as prescription drugs, rose 0.6% in November, but were still up just 1.8% from a year ago. CVS Health (CVS) said in a November earnings call that pharmacy same-store sales fell 3.4% in the third quarter, dragged down by generic-drug introductions. The profit squeeze on both its retail business and prescription benefit management unit, along with the looming threat of competition from Amazon, is behind CVS' acquisition of Aetna (AET).

Leading up to Wednesday's Fed policy statement, markets were pricing in just two rate hikes in 2018. In the short term, soft inflation readings and hawkish Fed signals could further flatten the yield curve at a time when the gap between the two-year and 10-year Treasury yield is already close to its narrowest point since shortly before the 2007 recession began.

Yellen said yield curve inversion, with short-term rates exceeding long-term rates, might not mean recession this time.

Yet there's reason to expect 10-year Treasury yields to rise amid solid growth and tax cuts, as well as simple supply and demand. In October, the Fed began to let its mortgage securities and Treasuries, which were accumulated to aid the recovery from the financial crisis, gradually run off its balance sheet as they mature. In addition, larger deficits thanks to tax cuts should create more issuance.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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