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Washington D.C. used to complain that Ronald Reagan employed a strategy of "starving the beast" – cutting taxes so that new spending was tough to legislate. Now, D.C. seems to employ the strategy of "gorging the beast" – spending so much that tax cuts are hard to pass.
The after effects of hurricanes Harvey, Irma, and Maria have done little to sway the opinion of Federal Reserve members that the economy is ready for further rate hikes. While leaving rates unchanged at today's meeting - as expected - they set the table for December.
The short-short list for new Fed Chair includes Janet Yellen, Fed Governor Jerome Powell and Stanford economist John Taylor, the author of the "Taylor Rule." Right now Jerome Powell – a former Wall Street executive at Dillon Reed – is the runaway favorite. Taylor and Yellen are a very distant second and third.
While tax cuts grab the headlines, the bigger issue for long-term economic growth is government spending. Tax receipts are above their long-term average as a share of GDP, but the government is still spending over $650 billion more than it takes in. And this government spending crowds out private sector growth.
Congress took a big step last week toward enacting some sort of tax cuts and tax reform. That big step was the US Senate passing a budget resolution creating the room for ten years of tax cuts totaling $1.5 trillion with a simple majority vote. This procedure means there is no need to break a filibuster by getting to 60 votes.
Next week, government statisticians will release the first estimate for third quarter real GDP growth. In spite of hurricanes, and continued negativity by conventional wisdom, we expect 2.8% growth.
If the current economic expansion lasts another year and a half, it'll be the longest on record, even surpassing the expansion of the 1990s that ended in early 2001.
Last week, at her press conference, Federal Reserve Chair, Janet Yellen said continued low inflation was a "mystery."
The big news today wasn't the Federal Reserve's decision to start gradually reducing its balance sheet in October. Almost everyone expected that. Instead, the big news was that twelve of the sixteen members of the Fed's interest-rate setting body – the Federal Open Market Committee – think the Fed will be raising interest rates by at least 25 basis points later this year.