The best policy mix for a currency is an expansionary fiscal policy and less accommodative monetary policy. It is the US policy mix of the Reagan-Volcker era of the early 1980s. It was the German policy mix after the Berlin Wall fell. It is as if the government has its foot on the accelerator and the central bank has its foot on the brake. And the currency is squeezed higher.
US monetary policy was on a path toward less accommodation before the US election, and we argued that regardless of who was elected, fiscal policy was likely to become more stimulative. As a candidate, Trump suggested a three-prong fiscal strategy of deregulation, tax reform, and a large infrastructure initiative that was even larger than the Democrat candidates advocated.
It seems that what has happened in recent months is that many investors have become more skeptical about the trajectory of the policy mix. The weak growth and decline in core inflation for four months through May has prompted words of caution from some officials. Market sentiment has swung hard from arguing the Fed is too dovish to now the consensus appears the Fed is too hawkish.
Outside of the confirmation of a Supreme Court nominee, the Trump Administration does not have much in the way of legislative victories in the first six months in office, which is often a time that newly elected Administrations, with a majority in both chambers, have a flurry of their signature legislation. The replacement of the Affordable Care Act has been bogged down, first in the House and now in the Senate. The debate over healthcare is exhausting much of the oxygen from other issues. Healthcare, as we have consistently argued is a necessary precondition for tax reform.
There seems to be some confusion of when tax reform will be ready. The White House legislative director was quoted recently suggested that he hoped to have a tax reform plan agreed by the Administration and both houses of Congress before the August recess in three weeks. This risks over-selling it. A White House spokesperson expressed confidence that a plan will be agreed upon in the fall. However, on a weekend talk show, Treasury Secretary Mnuchin said that the release of a full blown plan, as opposed to the single page memo of a couple of months ago, in early September. He expects legislative approval before the end of the year.