The Federal Reserve (fed)
© AFP 2016/ BRENDAN SMIALOWSKI

Federal Reserve Chair Janet Yellen emphasized recent improvements on the demand side of the US economy, which allow for a steady further normalization of monetary conditions. However, challenges to growth remain despite little to no opposition in Washington to Trump’s looming economic reform.

Kristian Rouz – During her two-day Senate testimony which began Tuesday, Federal Reserve Chair Janet Yellen expressed her optimism regarding US economic prospects, citing increases in household disposable incomes and improvements in consumer sentiment as supporting a further tightening of monetary conditions. Yellen’s commentary stirred cheering on Wall Street, with Goldman Sachs stock beating its pre-crisis record high.

With the US central bank seemingly supportive of President Donald Trump’s economic agenda on quicker policy normalization and lesser regulative interference in the market, and the US Treasury now led by Trump’s pick, former Goldman Sachs executive Steven Mnuchin, little institutional resistance to Trump’s economic reform is now expected.

“Waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession,” Yellen said.

The chances of a March interest rate hike increased following Yellen’s remarks, to 34pc in futures traders’ estimates, while the odds of three interest rate increases this year are still below 50pc. Market participants tend to trust the Fed’s earlier announcements of only two rises in base borrowing costs in 2017.

The Trump administration stated its economic policy goals earlier, saying they were designed to improve business investment and deal-making while promoting economic growth and higher inflation. These objectives will be achieved through trade protectionism, tax cuts and economic deregulation. Yellen’s testimony reflects the Federal Reserve Board’s willingness to remove its stimulus policies, in line with Trump’s agenda, which likely means higher earnings for corporate America as rates go up.

Amid these expectations, the US banking sector will generate greater returns in the higher-rate environment; Goldman Sachs beat its 2007 record close on Wall Street in Monday’s trading. The bank’s executives have recently been appointed to high-ranking positions in the White House, including the new Treasury Secretary Steven Mnuchin, which is seen as an overall positive sign by the financial sector.

Yellen also provided advice to Senate Republicans on the planned fiscal stimulus, suggesting the increased governmental spending should be aimed to boost longer-term productivity rather than short-term broader growth. However, when asked for more details by one of the senators, she did not provide any.

“I’m not going to tell you that,” Yellen said, leaving it to the Treasury to design the fiscal accommodation.

Goldman Sachs bankers, however, are more cautious regarding US growth prospects. Now that the Fed is steadily removing its supportive monetary policies, while the fiscal stimulus is not yet intact, the challenges to growth prospects are substantial. Analysts Jan Hatzius and Jari Stehn of Goldman Sachs warned that the fiscal stimulus might kick in with a gap or delay, as it might take until late 2017 or early 2018 for the legislation to pass.

That means the tax cuts and infrastructure spending might only start benefitting the US economy in 2Q18, while this year growth might be quite modest.