Fed sounds hawkish on interest rates / Trump tax reforms in focus

September 27th

Yesterday Federal Reserve head Janet Yellen reaffirmed the central bank’s commitment to keep pushing interest rates higher, saying that it should not be too gradual in its approach – words that will be seen as refreshingly hawkish to many investors. Confirmation of another rate hike in December has pushed bank stock prices higher this morning once again, even across Europe.

Today a major focus for investors will be what President Trump announces about tax reform in a speech later today in the US. A plan to simplify the American tax code and cut tax rates for individuals (especially those in the middle class) and companies, was a key message in Trump’s campaign. It is expected that the tax rate for corporations will be reduced by 15%, from 35% to 20%.

Though Trump has repeatedly stated that rates for businesses would be reduced to 15%, Republican Speaker of the House Paul Ryan (pictured shaking Trump’s hand) indicated in a New York Times interview recently that this may not be a realistic option. Still, any cuts they can get through would potentially be a great leap forward for the US economy and benefit investors simultaneously.

By reducing overall taxation, US companies may become more competitive financially. With lower rates across the board, many firms who were tempted to move abroad to save capital (cheaper labour costs, lower taxes) may choose to stay in the US too, creating more jobs instead of laying off their US-based workforce. A more favourable environment for businesses and individuals is likely to spur economic growth (which will boost stock markets too). The question now is whether the team behind tax reform can convince congress of the merits of the plan and get it passed.