Publication date: 5 January 2018 | Covering: December 2017
Monthly Briefing
- Fed December 12–13: Third hike of 2017 to 1.25–1.50%; three hikes projected for 2018; tax reform effect acknowledged
- Tax Cuts and Jobs Act: Congress passed December 20; signed December 22; largest US tax reform since 1986
- Bitcoin reaches near US$20,000 in December; crypto market at peak; institutional attention surges
- US equity markets hit new all-time highs through December; extraordinary year-end gains
- North Korea: Intercontinental ballistic missile tests throughout 2017; UN sanctions intensified
- BOJ monetary policy easing; Jamaica IMF programme completing; NHT J$6.5 million ceiling; rates 0, 2, 4 per cent
The Federal Reserve’s December Hike and the Tax Reform Backdrop
The Federal Open Market Committee raised the federal funds rate by 25 basis points at its December 12 to 13 meeting, lifting the target range to 1.25 to 1.50 per cent. The move was the third hike of 2017 and completed a year in which the FOMC had delivered on all three of its projected rate increases. The December decision was unanimous, and the accompanying Summary of Economic Projections maintained three hikes as the median expectation for 2018. The FOMC did note that it expected the recently-passed tax legislation to provide a modest boost to economic growth, though the committee was careful not to overstate the fiscal stimulus effect given uncertainties about its size and timing. The December hike brought the cumulative tightening since the December 2015 liftoff to 125 basis points across five moves, representing a meaningful but historically measured pace of normalisation.
Seven days after the Federal Reserve meeting, Congress sent the Tax Cuts and Jobs Act to President Trump, who signed it into law on 22 December. The legislation — the most sweeping reform of the US tax code since 1986 — reduced the corporate tax rate from 35 per cent to 21 per cent, simplified individual income tax brackets, nearly doubled the standard deduction, limited the state and local tax deduction, and allowed immediate expensing of capital equipment purchases. The corporate tax reduction was the centrepiece: it was expected to materially boost US after-tax corporate earnings, accelerate share buybacks, increase capital spending, and — over time — attract foreign direct investment. Markets had been rallying in anticipation of the legislation for months, and the S&P 500 gained approximately 20 per cent for the full year of 2017. For Jamaica, the US tax reform was relevant primarily through its macroeconomic effects: stronger US growth from fiscal stimulus would support tourism and remittances, while any associated dollar strength or interest rate effects would affect external financing conditions.
Jamaica’s Mortgage Market Through December
Jamaica’s mortgage market closed 2017 in its best domestic condition in many years. The Bank of Jamaica had continued to ease monetary policy through the year as its newly formalised inflation-targeting framework provided the credibility to reduce rates while maintaining price stability. The NHT’s J$6.5 million individual ceiling and 0 to 4 per cent subsidised rate structure continued to be the primary vehicle for affordable residential finance, and commercial banks competed actively in the broader mortgage space. Jamaica’s fiscal position had improved substantially through its extended programme with the IMF, with the debt-to-GDP ratio declining toward more sustainable levels and the government maintaining its primary surplus commitments. The island’s strong tourism performance in 2017 — a record year for arrivals — supported employment and consumer income across the economy, providing a positive foundation for the housing market entering 2018.
Looking Ahead
As 2018 begins, the Federal Reserve’s January 30 to 31 meeting will be Chair Yellen’s final before handing the chair to Jerome Powell — a transition closely watched for any signals about policy continuity. The US tax reform’s growth and fiscal effects will begin to show in economic data through the first quarter. For Jamaica, the transition to a post-IMF programme environment — with the institution of a successor programme arrangement — and the continued development of the BOJ’s inflation-targeting credibility are the domestic policy priorities. The island enters 2018 with its strongest macroeconomic fundamentals in a generation, positioned to benefit from the favourable global growth backdrop while remaining vigilant about the external risks posed by a tightening US monetary environment.
Mortgage & Housing Finance Disclaimer: This publication is for general information only and does not constitute mortgage, financial, legal or investment advice. Mortgage products, lending criteria, interest rates and borrowing costs vary between lenders and may change without notice. Readers should obtain independent advice from a qualified mortgage adviser, financial adviser or legal professional before making financial or property decisions.
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