Where now for US policy and markets following healthcare failure? - ING

James Knightley, Senior Economist at IGN, explains, "Donald Trump’s efforts to repeal and replace Obamacare have failed. Republican Senate majority leader Mitch McConnell found himself short of the votes needed to get it passed and instead took the decision to repeal only, but with a two year delay. In theory, this should give them enough time to come up with the healthcare replacement that has so far eluded them. This will be voted on “in the coming days”. We look below at what the political knock on effects for tax, the Fed and the dollar could be."

Key quotes:

What does this mean for tax policy?

"Given Donald Trump’s linking of healthcare reform with “meaningful” tax cuts this development suggests that there is less scope for aggressive fiscal stimulus being approved in the nearterm. At the very least it implies a dilution and delay. After all, healthcare reform was meant to save money that could help fund tax cuts."

"Healthcare and tax reform were President Trump’s two big action points. Failure on the first is likely to embolden opponents while hurting the credibility of the administration, which is already seeing plunging poll ratings."

"Former Republican Senate majority leader Trent Lott said defeat is a “blow to governing”. Tax reform is going to be just as divisive within the Republican Party as healthcare reform. Some Republican moderates are unhappy about tax cuts for the wealthy while cutting spending on programmes that are important to their own constituents."

This makes a December hike more likely than a September move from the Fed

"President Trump has pinned his hopes of strong growth on meaningful tax cuts so if they are going to be smaller in magnitude then growth forecasts will be lowered. However, there has been creeping doubt over recent months about their likely timing and scale, including within the Federal Reserve."

"As such, it is unlikely to significantly alter the market’s outlook for the path of Fed policy given it was already extremely doubtful of the Fed’s own prediction of four 25bp rate hikes between now and the end of 2018. We are still forecasting three 25bp rate rises, but it makes it more likely that the next Fed rate hike will be in December rather than September. It should not necessarily impact on the timing of the Fed’s balance sheet reduction programme, which could start as soon as September."