Fed Raises Rates & The Dot Plot Moves Higher

GOP Set To Vote On Tax Plan Next Week

The House and Senate have been in conference this past week. They have agreed upon a plan in principal. Some minor variables need to be solved. The goal is to have the votes early next week. The party leaders say they have enough votes to pass the bill. The Senate is expected to hold the final vote on Tuesday. The top individual tax rate in this new plan is 37% and the corporate tax rate is 21%. That’s 1% higher than the plan was originally. Lawmakers said that 1% increase was necessary to make the numbers work. The mortgage income deduction will be capped at $750,000. The Obamacare mandate will be repealed. For high tax areas like New York, $10,000 in state and local property taxes or income taxes will be allowed to be deducted. The deduction for pass-through companies is 20%. The top tax rate for pass-throughs is 29.6%. There won’t be a corporate alternative minimum tax. To get the moderate Senator Collins on board with the plan, the President agreed to pay subsidies to insurance companies and fund states to set up high-risk pools to prevent premiums from rising too quickly. The final bill will add about $1 trillion to the debt over 10 years.

FOMC Raises Rates 25 Basis Points

As expected, the Fed raised rates by 25 basis points. The guidance is for 3 rate hikes in 2018. I’ve been expecting 2-3 hikes, so that’s not a surprise. The Fed will increase its balance sheet shrinkage to $20 billion per month in January which isn’t a surprise as it said it would gradually increase the speed of the runoff in 2018. As you can see from the chart below, with the latest unwinding, the balance sheet is now at the smallest size since September 2014. I expect 2018 and 2019 to be the biggest years for the unwind. This depends on how the economy does. The longer the economy staves off a recession, the longer the unwind will go. The plan is to have the balance sheet stabilize between $2 trillion and $2.5 trillion.