<b>Abheek Barua & Bidisha Ganguly:</b> Fifteen minutes of fame

Role of central banks is diminishing as fiscal, trade and other govt policies come to the forefront

News coming from the US has been so dominated by Donald Trump’s executive actions that we barely noticed the Federal Reserve’s statement on February 1. Yet, this may not be that strange in the new global market environment where government actions are likely to play a much bigger role than central banks in determining market movements.
 
Detailed analysis and anticipation of the actions of major central banks, a hallmark of the post-financial crisis period, may soon become a thing of the past as attention shifts to fiscal, trade and other policies. This realisation led the Bank of England Governor Mark Carney to note that we are coming to the end of “central bankers’ 15 minutes of fame”. He felt this would lead to a better balance between monetary and other policies in influencing economic outcomes.

 
Post Trump’s election victory, markets have rallied in anticipation of the promised spending on infrastructure, corporate tax reform and a relaxation of regulations. Most institutions including the International Monetary Fund have upgraded their forecasts of global growth in 2017 and 2018 in expectation of fiscal expansion across developed economies. But the mood seems to have shifted in the US with many analysts now questioning the new government’s ability to move ahead with the expected policy changes.
 

Political opinion has become sharply polarised following the curbs on immigration and trade that the Trump administration has threatened. Policies that were perceived as election promises, to be jettisoned as the government takes charge, are now getting closer to implementation. And policies that were taken more seriously and considered to be relatively less controversial such as higher spending on infrastructure are not yet being discussed.

 
The American system has checks and balances to prevent executive overreach. For any policy to be implemented, particularly one that requires funding, it needs to be approved by the Congress. Although the Republican Party now enjoys a majority in both Houses, the majority in the Senate is currently by just two seats and many Republicans have openly expressed their reservations about the immigration ban. Without their support, there is little possibility of a fiscal stimulus going through.
 
In any case, there is currently little clarity on the size and composition of the stimulus as also the nature of any corporate tax reduction. An earlier proposal by the Republicans had suggested a destination-based cash flow tax. This would entail a border adjustment, in other words, making exports tax exempt while disallowing expenditure on imports as a deductible. However, Trump is believed to have dismissed the proposal as “too complicated”.

 
Any specifics of the Trump administration’s economic plan will become known only by the end of February when he addresses a joint session of Congress. Even after that, it will take a few months to know whether the plan will find support in both Houses of Congress. By then, many other contentious actions may harden the stance of Congressmen, making it difficult to push through business-friendly legislation on tax reform and fiscal stimulus. In any case, it will be mid-year before any agreement is reached.
 
A similar fate is apparent for other legislative changes that were close to Trump’s heart such as the repeal of Obamacare and the dismantling of the Dodd-Frank financial regulation. Both have been slowed down by the reality of Democratic opposition and are expected to be pushed into next year. Even the Cabinet confirmation process is proving to be extremely slow, leading Trump to complain about “obstruction” by Democrats.

 
For those still following the Fed, it is unlikely that it will take any action before it has more clarity on the fiscal state of play. A fiscal stimulus with its expected impact on growth and inflation will certainly prompt a rate hike by the Fed but given the range of possible fiscal outcomes, it will likely wait for more details. An imminent rate hike in the US, which seemed a strong possibility a few months ago, may be ruled out.
  Abheek Barua is chief economist, HDFC Bank. Bidisha Ganguly is chief economist, CII