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Macro Comment US

Macro Comment US — Republican tax reform toward defeat

We do not think the Republicans are able to pass a tax reform in Congress, but if they do, we expect a watered-down reform without the potential to lift growth sustainably. This article explains why the barriers to passing a tax reform bill are gigantic. One group's gain from the tax reform tends to be another group's loss. The rift goes between rich and poor, as well as between different regions. The slim Republican majority in the Senate reinforces the problems, as it makes it easy for small coalitions of Senators to block a decision.

Petter Lundvik, Senior Economist | pelu16@handelsbanken.se

Macro Comment US — Who will become the next Fed Chair?

Trump's idiosyncrasies make it hard to forecast which of the five candidates on his shortlist will become the next Fed chair. Our best guess is Gary Cohn. He is the only candidate on the list in favour of both low interest rates and financial deregulation. However, Trump sees him as disloyal, which could open the way for a nomination of Jerome Powell or Kevin Warsh, who are both considered personally loyal to Trump.

Petter Lundvik, Senior Economist | pelu16@handelsbanken.se

Macro Comment US — Balance sheet reduction in September

We revise our Fed forecast: we now believe that the central bank will hold rates steady in September and instead announce a plan to reduce its balance sheet at the meeting. In June this year, the Fed published a plan for quantitative tightening. Balance sheet reductions are not intended to play an active role in mone-tary policy during normal times. The Fed's intention is that they should run quietly in the background for years, while monetary policy is operated through adjustments of the federal funds rate.

Petter Lundvik, Senior Economist | pelu16@handelsbanken.se

Macro Comment US — Financial conditions key to the Fed

We are convinced that financial conditions-both actual and expected-are key to understanding why the Fed has not delivered in line with its forward guidance since the start of policy normalisation in late 2013. However, at present, consistency between forward guidance and policy delivering seems to be improving. So far in 2017, actual rate increases have been in line with the Fed's forward guidance. Nevertheless, we expect financial conditions to deteriorate sharply in the future, which will contribute to an end of policy tightening in 2018 and to prompt a recession in 2019.

Petter Lundvik, Senior Economist | pelu16@handelsbanken.se

Macro Comment US — Balance sheet reduction and financial markets

In June, the Fed announced a detailed plan for balance sheet reduction, before it had assessed the amount of securities needed to carry out policy in the future. The amount depends on monetary regime. The choice has not yet been made. The Fed Chair, Yellen, does not believe that the reduction would affect financial conditions much. Yellen's intention is for the reduction to run quietly in the background for years, while monetary policy is operated through adjustments of the Fed funds rate. In our view, Yellen is a little too optimistic.

Petter Lundvik, Senior Economist | pelu16@handelsbanken.se

Macro Comment US — Limited need for Fed balance sheet reduction

We argue that the Fed will likely stick to its current "floor" policy regime. That implies that the Fed needs a balance sheet of at least USD 2,900bn today and USD 4,000bn in ten years, which indicates that a sharp reduction of the USD 4,500bn balance sheet is not urgent. The Fed plans to start unwinding its balance sheet later this year before Chair Janet Yellen's term ends in February next year. However, we expect the reduction to take place very gradually, with the Fed probably aiming for a reduction of USD 500bn over the first five years.

Petter Lundvik, Senior Economist | pelu16@handelsbanken.se