The Fed Wants to Take Credit for The Trump Rally
$DIA, $SPY, $QQQ, $VXX
Tax cuts were bad news for the stock market in the 30 yr era ushered in by then-Fed Chairman Paul Volcker, who took office in Y 1979. That was because they tended to raise anticipation that Fed officials would offset them with interest-rate increases, according to the paper.
Its authors conclude that one of the reasons stocks have rallied this time around may be that central bankers have adopted caution toward tightening in the wake of the Y 2008 financial crisis and subsequent slow economic recovery under the Hussein Obama Administration’s 8 years of anti-business low inflation, no growth big government policy.
The Trump Administration is conducts a search for a nominee to lead the Fed when current Chair Janet Yellen’s term expires in February.
Ms. Yellen is on a White House shortlist of candidates for the job that includes current and former Fed Governors Jerome Powell and Kevin Warsh, Gary Cohn, director of President Trump’s National Economic Council, and John Taylor, an economics professor at Stanford University.
Fed economist Anthony Diercks and William Waller of Carnegie Mellon University noted that from Ys 1980 to 2008, increases in discount rates associated with news about tax cuts swamped the positive effects of cash flow that tax cuts would have on stock prices.
Moreover, the higher interest rates would have had the effect of slowing economic activity, reducing the positive cash flow generated by the tax cuts in the 1st place.
The recent experience could be due to a few issues, as follows:
- Additional factors at play such as changes in regulation, government spending, and repatriation that may be important.
- The proximity to the Zero lower bound monetary policy may not be acting as aggressively as it did in previous post-1980 tightening cycles, and
- Investors are unusually Optimistic about the Trump presidency going forward
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