Looks like the odds weren’t ever in the GOP’s favor these days as the Trump administration failed to repeal Obamacare and replace it with their new healthcare bill. What does this mean for the U.S. economy and the dollar?
YUUUGE Funding Gap
Remember when Trump promised to increase infrastructure spending, build a wall along the Mexican border, and boost the budget for defense and the military? Well, he also planned on getting a huge chunk of the funds to support these plans from repealing the Affordable Care Act or Obamacare. And now that Congress has decided to pull out the new healthcare bill knowing that they won’t garner enough votes to pass it, this leaves the White House short by billions of dollars to finance its reforms.
You see, the Congressional Budget Office estimates that the government could trim its deficit by around $150 billion over the 2017-2026 period if Obamacare is repealed, although this would leave nearly 24 million Americans without health insurance after a decade. While it would result to tax breaks for people making over $200,000 each year, it would also increase insurance costs for Americans in their 50s and 60s.
But as House Speaker Paul Ryan conceded last Friday, Obamacare taxes will have to stay in place and Republicans have no choice but to go back to the drawing board to figure out how they can fix the rest of the tax code while sticking to their 2017 budget. “We have even more agreement on the need and the nature of tax reform, on funding the government, on rebuilding the military, on securing the border,” he added.
Even with these words of reassurance, market watchers can’t help but speculate that the Trump administration will have a tough time pushing its agenda from here. Not only does the healthcare bill failure leave them with a shortage of funds to pursue other reforms, but it also suggests that similar policy changes might encounter the same amount of opposition.
Keep in mind that the Donald is also pushing for a border adjustment tax, which is projected to add the $1.2 trillion in government revenue also needed to support their spending plans. Apart from giving American companies tax breaks for shipping goods to other countries, this would also remove these tax incentives from American companies that import products, essentially encouraging businesses to keep jobs and manufacturing activity in the homeland. With the recent letdown in the Obamacare repeal, it’s hard to imagine that the administration can pass this reform without any House of Cards-esque drama.
That leaves the rest of the Trump agenda in jeopardy as well. Since the elections, U.S. markets have been rallying on hopes of corporate tax cuts and financial deregulation, but it looks like these changes may take longer to enact than initially anticipated, unless of course Trump’s negotiation skills are as great as he thinks they are.
Risks to Rate Hikes
With less fiscal stimulus than anticipated and a potential correction in the U.S. stock market on weaker expectations of tax reform, confidence in the U.S. economy could take a hit. And when investors and consumers are less optimistic about financial conditions, they tend to scale back borrowing and spending activity, which can then pose some headwinds to overall growth.
A few Fed policymakers have mentioned that they already incorporated fiscal stimulus into their economic projections, most of which maintain that the U.S. economy is approaching full employment and target inflation and that at least three rate hikes are in the cards this year. Others have acknowledged that there are upside risks to their economic forecasts stemming from fiscal policy changes so they may adjust their biases given these recent developments.
By the looks of it, the Greenback is having a tough time regaining ground against its forex counterparts now that the “Trumphoria” is starting to fade. The U.S. economy might need to fly all on its own from here, without any additional lift from corporate tax cuts or with a smaller increase in government spending, and rely on the positive momentum it has generated in the past few months.
Rate hike expectations for June have already tumbled upon hearing news of the healthcare bill failure, leading forex junkies to set their sights on September instead. Do you think these setbacks for the Trump administration will have repercussions on the Fed’s tightening time line?