The latest US job report has been released and the low unemployment rate indicates that a Fed rate hike is inevitable. Many financial institutions have also brought forecast of the timing of the Fed rate hikes in 2017 and some experts have suggests there may be three rate hikes in 2017, given the current US economic condition. However, the current US President is famous of his deregulation and tax cut plans. Such fiscal policies are likely to stimulate the economy.
Deregulation in the banking sector can change the strategies that many financial institutions choose, they are more likely to increase leverages and take more risk. Also, massive tax cuts can increase the incentives for companies as well as individuals to make more profits. Tax cuts will increase the expected returns when the return is higher, it implies that individuals and companies are willing to take higher risk, as normally higher return needs to be awarded to higher risk, tax cuts ensure higher return will be awarded.
On the other hand, the US Fed is almost certain to increase base rates this year. This will reduce the returns from investment and cool down the current heat in the US financial market. This will create an opposite force against the momentum formed by the possible future fiscal policy. Individuals and financial institutions may take riskier strategies to conduct their banking businesses in order to generate higher profits under a contractionary monetary policy environment to enjoy the increase in their profits and incomes caused by tax cuts. Especially to individuals, massive income tax cuts can increase the attractiveness of taking riskier actions. And their employers will ignore their misconduct if they do not make losses.
Therefore, in the future financial market, investors and traders may perform more radically and aggressively to gain more returns and the systematic risk will increase due to their actions.
No comments:
Post a Comment