Jeremy Siegel, Patrick Harker and Jeremy Schwartz on the outlook for the U.S. economy in 2017
As the Trump Administration settles in to the Oval Office in late January, one of its foremost objectives should be to provide clarity on its policies, according to Patrick Harker, president and CEO of the Federal Reserve Bank of Philadelphia who was formerly dean of Wharton and president of the University of Delaware.
“My biggest concern is concern,” said Harker. “The biggest risk we face is uncertainty. If you ask every business leader, their biggest concern is: ‘Whatever changes occur, just do them gradually. Let us adapt.’ They have been in a world of change for a long time. That’s not going to go away; we can’t take away change…. Their biggest concern is if something hits them, and they simply can’t or don’t have the time and the resources to adjust.”
Harker and Wharton finance professor Jeremy Siegel discussed the outlook for the U.S. economy in 2017 on the “Behind the Markets” show on Wharton Business Radio on SiriusXM channel 111. Siegel hosts the show with Jeremy Schwartz, director of research at WisdomTree. (Listen to the podcast at the top of this page.)
Harker seemed to echo the sentiments at the Federal Reserve, as recorded in the minutes of the Federal Reserve’s Federal Open Market Committee meeting on December 13-14 that were released on Wednesday. “[The FOMC members] pointed to a number of risks that, if realized, might call for a different path of policy than they currently expected,” the minutes noted. “Moreover, uncertainty regarding fiscal and other economic policies had increased. Participants agreed that it was too early to know what changes in these policies would be implemented and how such changes might alter the economic outlook…. Moreover, many participants emphasized that the greater uncertainty about these policies made it more challenging to communicate to the public about the likely path of the federal funds rate.”
Siegel said Trump’s victory “has changed everything for the Fed as well as for the economy.” He agreed that many basic policies of the Republican Party, many of which Trump supports, “are very positive for the market.” He noted that while the financial markets were prepared for a Hillary Clinton victory, they adjusted quickly to the reality of Trump as president and rallied ahead. “I thought it would take them a little longer to get from the negatives to the positives,” he said. “It took about six hours before they said, ‘Wow, this could be very, very good.’” Stock prices and bond yields showed “a tremendous rise.”
“My biggest concern is concern. The biggest risk we face is uncertainty.” –Patrick Harker
Siegel added that the financial markets were relieved that following his victory, Trump took a softer line on issues such as U.S. relations with China and Mexico than he did during the campaign. “The first thing he didn’t say was he was building the wall [on the border with Mexico] and cutting off trade with China, which of course scares the market, as it should…. He has been much more conciliatory on those, and he appointed people who are globalists and understand the importance of trade.” It also helped that Trump seemed to embrace the Republican Party agenda and was willing to meet with Paul Ryan, speaker of the House of Representatives, who had reluctantly endorsed Trump.
According to Harker, part of the market reaction was simply about resolving the uncertainty around the election period, clarifying that he was speaking in his personal capacity and that his remarks do not reflect those of the Federal Reserve or the FOMC. “I hear from the market that people are optimistic, but until the specific policies come in play that we can model and analyze, it’s hard to say if the market has over or under reacted, or whether it is going to boost or not boost economic growth.”
Harker pointed to the so-called Partisan Conflict Index that the Federal Reserve Bank of Philadelphia publishes, which monitors “the degree of political disagreement among U.S. politicians at the federal level” as it is reflected in media reporting. “When [partisan conflict] is heightened, it hurts economic development and economic growth,” he said. “Any uncertainty is bad for the markets.” He noted that the index stayed elevated all the way through the election. However, he predicted that the index would decrease after post-election data is factored in.
According to Siegel, the prospect of lower corporate taxes in the Trump regime was a big factor in the 6%-8% rise in the S&P index. “We don’t know if it will be effective in 2017 or 2018, but analysts expect a 10% increase in corporate earnings as a result of lower taxes,” he said. “That in and of itself can explain a 10% rise in markets.” The second factor that explains the surge in the index is the hope for fewer regulations, he noted. Also at work are expectations that the Affordable Care Act will be repealed, as well as a loosening of regulations on the financial sector. Another factor is the expectation of infrastructure spending, pushing up some stocks and commodities related to that, he added.
Corporate tax reform “is important for the U.S. to be globally competitive,” Harker said. The possibility of U.S. firms being asked to repatriate taxes will have a positive impact, he added. (During his campaign, Trump said he planned a one-time tax holiday of a 10% tax instead of the existing 35% to lure U.S. companies to repatriate money held abroad.) It remains an open question as to what will replace the revenue lost as a result of that tax holiday. “Another open question is how the total corporate tax package – not just corporate taxes – gets resolved over time.”
“Positive momentum” exists on how people feel about reduced regulations, Harker said, but he added that much depends on how that plays out over time. The Republican Party has announced several proposals, but they are yet to be finalized. “What do those packages look like, when it is all said and done — that is the key for me. Right now, it is too early to tell.”
Siegel pointed to the prospect of changes to the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act that was enacted after the financial crisis. “There are some good things and some bad things in Dodd-Frank,” he said. “Could we selectively undo parts of that act and spur the banking system again?” Harker agreed that “there are some good parts about Dodd-Frank that we need to maintain.” He offered the example of the provisions in that statute for the resolution process for failing banks. “Whether it is Dodd-Frank or in other venues, we need to have a very clear path when a bank gets into trouble – how do we quickly resolve that issue, and not let it linger for too long,” he said. “When it lingers for too long – as we saw in the 2007-2008 financial crisis – the contagion effects are quite severe.”
The regulatory regime for well-performing banks