Tax Cuts + Steady Fed = Record Highs


Late Friday, two key senators spoiled the political media’s efforts to gin up some last-minute suspense over next week’s final vote on the tax cut bill.

Senators Marco Rubio (R-Fla.) and Bob Corker (R-Tenn.) said they would vote “yea” on the final version of the Tax Cuts and Jobs Bill that emerged from a conference reconciling the two versions passed by the House of Representatives and Senate.

Sen. Rubio had unconvincingly positioned himself as a holdout to get a bigger child credit for low-income families, while Sen. Corker had opposed the original bill. The bogus media “suspense” was because Sen. John McCain (R-Ariz.) was back in the hospital in connection with his cancer treatment and may not be able to cast a key vote in a chamber that leans 52-48 Republican.

But now, the House and Senate are ready to pass the revised bill and send it on to the White House for President Trump’s signature. Neither he nor the Republican congressional leaders have said they are tired of winning yet.

That was enough to give the markets a late-day shot in the arm. The Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite index closed at record highs. All three are approaching major benchmarks—the Dow is headed for 25,000, the S&P for 2700 and the Nasdaq for 7,000.

It wasn’t only tax cuts, though.

On Wednesday, Janet Yellen gave her final news conference as Federal Reserve chair. She steps down in February, to be replaced by Jerome Powell, who has served on the Fed’s Board of Governors for five years.

Of all the selections President Trump could have made (he said Yellen had “done a terrific job” but didn’t reappoint her anyway), Powell is the one most likely to follow the course set by Yellen and her predecessor, Ben S. Bernanke. During his tenure, he has stuck with the Chair on all monetary policy votes, with nary a dissent.

Powell will probably loosen the tight leash Fed regulators have put around the big banks’ necks, but his monetary policy will likely be the same: gradual increases in the federal funds rate (three or at most four hikes next year) and gradual reductions in the Fed’s balance sheet—some $50 billion a month by later next year.

Of course, any more wage pressure from a tightening jobs market or overheating from all those tax cuts sloshing through the economy (I expect the overwhelming majority of them to go to share buybacks and dividends) could change the Fed’s calculus. But for right now, the higher earnings promised by tax cuts and the Fed’s steady hand add up to higher stock prices.