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Fed not weighing possible tax reform effects, governor says


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Fed not weighing possible tax reform effects, governor says

The U.S. Federal Reserve is not considering the potential economic effects of tax reform as the central bank debates monetary policy for 2017, Jerome Powell, a governor of the Federal Reserve, said June 1.

The prospects for changes in the tax code are too uncertain to factor into the discussions, Powell said in response to a question after a speech at the Economic Club of New York.

While there is an expectation that something — perhaps rate reductions — will happen in 2018, Powell described tax reform efforts "as something that bounds the downside."

As to raising interest rates and normalizing the balance sheet, the Fed should move with "continued patience," Powell said.

"While the recent performance of the labor market might warrant a faster pace of tightening, inflation has been below target for five years and has moved up only slowly toward 2%, which argues for continued patience, especially if that progress slows or stalls," he said in his speech.

Powell said the normalization of the federal funds rate -- the median estimate by participants in the Federal Open Market Committee is 3% -- still has "several years to run."

The Fed has raised interest rates once this year, in March, by 25 basis points to a target range of between 0.75% and 1.00%. Two more rate rises are expected this year.

Plans to normalize the Fed's $4.5 trillion balance sheet should have only a "modest" effect on rates, Powell said. Economic models suggest that if the Fed begins the process at the end of 2017, as opposed to 2018, it should raise the term premium by only about 5 basis points, he said.

Powell also said Treasury yields did not react strongly to the central bank's discussion of its plans to reduce its balance sheet. In the minutes of its May meeting, the Fed unveiled a proposal to set caps on its reinvestment rates that would gradually increase.

However, the Fed balance sheet is not expected to go back to what it was before economic crisis. Powell suggested it could be about $2.2 trillion.