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The difference between tax hikes and rate hikes

| Posted by: Paul Donovan | Tags: Paul Donovan

  • The threat of more trade taxes is pushing markets around. US President Trump's economic adviser, Kudlow, said the president was hopeful of a breakthrough in talks with China. That helped equities, even though Kudlow's comments were hedged with warnings about the probability of more US tax increases.
  • Tax increases are nearly always negative for the economy and equity markets. Interest rate increases are not necessarily negative. The US Fed's policy is to stabilize, not to reduce growth (inflation needs to be controlled but does not need to be squeezed). Monetary policy is a balance, and does not have to be a restriction.
  • US Fed Chair Powell's speech today may give a sense of the balancing-not-restricting role of the Fed (although economics is not the Fed chair's area of expertise). The minutes of the last Fed meeting are released tomorrow, and may give more insight.
  • Media reports suggest UK Prime Minister May is to allow amendments to the UK-EU divorce bill, when Parliament debates this. As Parliament does not appear to have a majority in favor of anything, that may not produce any change. The Bank of England publishes an assessment of the divorce, which will become a political football almost at once.