By Övünç Kutlu
U.S. letter, Feb. 13

What happened last week?

One of most important developments in the American economy last week was U.S. President Donald Trump declaring the announcement of his tax reform plan in the next few weeks, and as a result, the U.S. stock market broke records on Thursday and Friday.

Trump said Thursday that he would announce a “phenomenal” tax plan in the next two to three weeks, and this tax reform would “lower the overall tax burden of American businesses.”

After his statements, the Dow Jones, the S&P 500 and the Nasdaq indexes reached all-time high levels on Thursday and Friday, in the hope that the new tax plan would increase economic growth.

During his campaign, Trump promised to lower corporate tax rate from 35 percent to 15 percent, and after taking office the president said he would decrease the tax rate on America’s middle-class.

Some experts believe that such steps would increase the budget deficit and national debt, since the government’s tax revenues would decrease.

Trump, on the other hand, argues that lower taxes would increase investments, job gains and consumer spending – which would offset lower tax revenues, and benefit economic growth positively.

Another important development last week was the resignation of Daniel Tarullo, a member of the board of governors of the Federal Reserve.

Tarullo supported the 2010 Dodd-Frank Act, which increased regulations on the American financial system and on Wall Street. His resignation came one week after Trump signed an executive order on Jan. 3 that plans to eliminate most of the Dodd-Frank Act and lower financial regulation.

Fed St. Louis President James Bullard also spoke last week, indicating that it is unlikely for the central bank to make a rate hike in March due to uncertainties surrounding the new government’s monetary policies.

On the energy front, the U.S. Army Corps of Engineers announced Tuesday it would grant approval for the construction of the controversial North Dakota Access oil pipeline. The decision comes after Trump signed an executive order two weeks ago that expedited the completion of the North Dakota Access and Keystone XL oil pipelines. 

During his campaign, Trump promised to “unleash an energy revolution” in the U.S. However, the North Dakota Access pipeline, which is worth $3.7 billion and would stretch from the oil-rich Bakken formation in North Dakota and carry 470,000 barrels of crude through South Dakota and Iowa to Illinois, was protested across the nation by Native tribes and environmentalists.


What to expect this week?

Investors will continue to closely watch Trump’s moves on the economy and speeches from Fed officials this week. The stock market could reach new record levels if Trump continues to move rapidly in his economic and energy promises, and if Fed officials avoid giving signals on a rate hike for next month.

Fed Chair Janet Yellen will testify on Tuesday on the Senate Banking Committee and on the House Financial Services Committee on Wednesday.

On Tuesday, Fed Richmond President Jeffrey Lacker, Fed Dallas President Robert Kaplan and Fed Atlanta President Dennis Lockhart will speak. On Wednesday, Fed Boston President Eric Rosengren and Fed Philadelphia President Patrick Harker will also make speeches.

It is highly unlikely that the Fed will make a rate hike at its March meeting, since members of the Federal Open Market Committee (FOMC) are expected to wait and see how Trump’s policies will firstly affect the economy. However, speeches this week, will give hints to investors about whether, or to what extent Fed officials differ on a rate hike decision.

Trump, on the other hand, said during his campaign that he does not want the Fed to increase its benchmark interest rate too much, since he wants to avoid the value of the American dollar rising too much against other currencies so the U.S. can increase export levels.

On Tuesday, Producer Price Index for January will be announced. On Wednesday, Consumer Price Index and retail sales for January will be revealed. And on Thursday, new home sales for last month will be announced. If these macroeconomic data come in line with, or better than, market expectations, gains on the stock market are expected. 

13 Feb,2017