No surprises from Fed; tax reform next up

There were no surprises from the Federal Reserve (Fed), our nation’s central bank, at its September meeting last week. The Fed decided to leave short-term interest rates (the Federal Funds rate) unchanged. It also announced it would begin to reduce the amount of bonds it owns. You may have heard this referred to as ‘reducing its balance sheet.’ During the financial crisis, the Fed increased its balance sheet (by buying bonds) from about $900 billion to $4.5 trillion in order to help the economy grow. In theory, this move caused interest rates to stay low which then encouraged bank lending. The Fed now believes the economy is strong enough to continue to grow without this ‘emergency’ stimulus. It's likely the Fed only shrinks its bond holdings to around $2-$3 trillion over the next few years.

However, while interest rates were left unchanged, the Fed indicated it would raise interest rates one more time this year, probably in December. Currently, there’s about a 60% chance of a Fed hike this year. The Fed also suggested it could raise interest rates two to three times next year; but this projection could change significantly because the term for current Fed Chair Janet Yellen ends in February 2018. It is unknown who the next chair will be, though some economists believe Yellen will be reappointed. Any additional increases in the Federal Funds Rate will have an impact on the interest rates you pay on your credit cards and may increase the costs of other loans like the rates on mortgages and car loans.

This week, President Donald Trump and other Republican leaders are expected to release a framework for tax reform. Many political pundits believe the Trump administration will seek to reduce the top corporate tax rate to 20% from 35%. If the administration is able to cut corporate taxes like this, that likely would be beneficial for U.S. companies and your stock investments. A one-time tax cut would provide an immediate bump in corporate profits of about 10%. President Trump is also looking to simplify the tax code for individuals by reducing the number of tax brackets, lowering tax rates, and doubling the standard deduction to $11,400 for individual filers. Any proposed legislation will probably be altered as it makes its way through Congress.

The Simply Money Point

While the Fed's actions do not encourage growth, the U.S. economy has little risk of falling into a recession in the next six to nine months. Even with the effects of Hurricanes Harvey and Irma and Hurricane Maria in Puerto Rico, it's likely the U.S. economy will grow around 2% to 2.5% in the third quarter (July, August, September). And if there is tax reform passed, the U.S. economy could be positively impacted in 2018. At Simply Money Advisors, we believe this is positive for stocks. While there could be some uncertainty in the stock market in the short run, the growing economy and strong price momentum suggest higher prices are ahead.

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