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(Z1)‌‌ Support Appears Exposed

By Jean Yung
     WASHINGTON (MNI) - Federal Reserve Bank of Cleveland President Loretta
Mester told reporters Thursday she remains in a wait-and-see mode on the
potential effect of a tax reform bill to alter the economic outlook and
meanwhile continues to support gradual increases in the Fed's benchmark interest
rate. 
     Tax proposals can raise the underlying growth rate of the economy, she
said, but "It really depends on what gets passed," she said on the sidelines of
the Cato Institute's monetary policy conference. 
     Fiscal policies such as workforce development, productivity enhancements
and a "sensible reduction in regulation" such as simplifying the tax system, in
lieu of blanket tax cuts, would help jog growth over the long run, said Mester,
who votes on rates next year.
     "Depending on the mix it takes a while for those kinds of changes to
actually affect the economy," she said. 
     She added that she built in a small effect of a tax proposal into her
latest Summary of Economic Projections submission, "But that wasn't the
rationale I had for an upward tilting gradual increases in the funds rate. It
was based on fundamentals." 
     She continues to expect labor markets to be strong and inflation to reach
the Fed's 2% target by late next year. 
     Firms in her region have reported increasing wages in recent months, Mester
said, adding to the evidence that "We have seen a slight acceleration in wage
growth over the past couple of years." 
     However, she added, "I do think it'll be hard to see much more strong
acceleration in wage growth" due to a slower pace of improvement in
productivity. 
     "I do think that there's more evidence than just the aggregate measure of
wages to suggest they could pick up from where they are now," but that lower
productivity growth will cap that rate. 
--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com
[TOPICS: MMUFE$,M$U$$$]