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WASHINGTON (Reuters Breakingviews) - Steven Mnunchin’s stock-market brag could turn out to be a double-edged sword. The new U.S. Treasury secretary says the post-election rally in the equities market reflects faith in President Donald Trump and his promises for tax reform and fiscal stimulus. Both plans need approval from Congress, and may be accompanied by higher inflation. Anti-immigrant and trade policies could also mute market gains.
Mnuchin told CNBC on Thursday that he hopes to have a tax-reform bill passed by Congress by August. That’s an ambitious timetable, even with Republicans controlling Congress and the White House. There are major differences between the House of Representatives and the Senate, which will likely come up with a separate proposal. One senator said current House tax proposals would be lucky to draw 10 votes out of 100. The administration will use its own rosy growth forecasts compared to the Congressional Budget Office estimates on which lawmakers rely.
Congress already has a full agenda. The first priority is repealing and replacing Obamacare, but lawmakers have yet to present a plan amid disagreements. The Senate is also considering Supreme Court nominee Neil Gorsuch, who needs 60 votes to beat a filibuster. Republicans are eight votes shy of that number. Lawmakers are already considering pushing Trump’s plan to spend $1 trillion on infrastructure to next year, and Mnuchin didn’t highlight it on Thursday.
Yet investors betting on a fiscal stimulus and tax reform have pushed the S&P 500 Index up by more than 10 percent since the November election. Mnuchin said the performance reflected confidence in Trump’s policies "This is a mark-to-market business, and you see what the market thinks," Mnuchin said.
Trump’s campaign pledges could spur inflation, which is already creeping up. Consumer spending has been healthy and the Federal Reserve Bank of Cleveland reported last week that inflation expectations hit 1.92 percent. That is still shy of the central bank’s 2 percent target but higher than the 1.6 percent reported at the end of December. Rising inflation could put the Fed on a quicker path for boosting interest rates.
While tax reform and infrastructure remain iffy, Trump’s concrete moves to crack down on immigration and pull out of trade deals will hit the economy. When stock prices fall, as stock prices do, Mnuchin may find claiming credit for the market's rise was a risk not worth taking.
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