Kyran Fitzgerald


Fed decisions have power to affect us all

His nomination as the next head of the US Federal Reserve means Jerome Powell is set to become one the world’s most powerful and influential individuals, writes Kyran Fitzgerald

Fed decisions have power to affect us all

Leo Varadkar has been out on the west coast of America, paying homage to some of the tech titans who happen to hold a good chunk of this country’s future business prospects in their hands.

The social media giant Facebook appeared to offer some generous hospitality to the visiting guest in the form of a significant jobs announcement. But the Yuletide spirit has yet to envelop Apple CEO Tim Cook.

The Taoiseach did not secure any commitment about the proposed data centre project in Athenry, which as of now, is on indefinite hold after a lengthy and highly disruptive planning process. Disappointment at Apple was matched by let down over the recommendation in respect of the Rugby World Cup tournament.

Not a happy week for Team Ireland. ‘Must Do Better’ was the message. Disappointment for Team Drico and Team Leo.

The sense that a moment of truth is approaching these shores grew when the Republican Party in the US Congress unveiled its long-awaited tax reform plan.

The headline proposals were predictable enough. The bill plans to cut the number of income tax brackets from seven to four while the corporation tax rate would drop from a maximum of 35% to 20% in line with the demand put forward by President Donald Trump.

The cut in the corporate tax rate is being combined with a 20% excise tax on cross-border payments aimed at foreign companies with large US operations, which may be an unexpected sting in the tail for Irish companies which have invested heavily in the US.

The Trump team are keen to secure passage of the proposed ‘tax reforms’ — major tax cuts in fact — by the year-end as part of a move to shore up the president’s political base amid signs of weakness in his poll ratings.

The move by special investigator Robert Mueller to impose a form of house arrest on former Trump campaign manager, Paul Manafort and a close associate, have heightened what is a febrile mood in Washington.

In what was indeed a significant week, the administration also confirmed the replacement of the respected chair of the US Federal Reserve, Janet Yellen, by another board member, Jerome Powell, a 64-year-old from a legal and financial background. Mr Powell will be America’s and the world’s top central banker and will also rank arguably only behind the president in terms of sheer power.

There was a degree of relief at the news as Mr Powell is regarded as a cautious and competent individual. The general verdict is there should be a fair degree of continuity between Mr Powell and Ms Yellen. Nevertheless, the appointment has been criticised, in particular by economists who have noted Mr Powell lacks expertise in the field.

Jeffrey Bergstand, a professor of economics at the University of Notre Dame, was scathing: “Politics has overshadowed economic expertise in the new appointment,” he said. In his view, Mr Powell may turn out to be a weak leader who feels unable to resist politicians, including Mr Trump and Republicans who will be demanding to remove some of the regulatory restrictions put in place after the crash.

Mr Bergstand recalled the last non-economist to run the Fed was a former CEO, William Miller, who held the office during the presidency of Jimmy Carter, in the late 1970s. During Mr Miller’s 18 months in the job, prices accelerated, in part due to his expansionist monetary policy. He was unlucky in that the Iranian revolution and second oil crisis occurred on his watch.

Mr Miller was replaced by Paul Volcker, who jacked up interest rates in an ultimately successful effort to squeeze out inflation.

Mr Powell could, of course, turn out to be a strong leader who responds to a deficit-boosting budget emerging from Congress by adopting a tough monetary stance. If that turns out to be the case, those with heavy borrowings, at home and overseas, will have to watch out.

The tax package unveiled last week by speaker of Congress Paul Ryan has its share of critics and looks set to be watered down by the time it reaches and then passes through the US Senate, where the Republicans’ position is precarious.

The property and construction lobbies are hopping mad over proposals to cap mortgage relief and they will be putting the squeeze on members of Congress.

But Mr Ryan is determined to deliver his promise of around $1,200 (€1,035) worth of tax cuts to the average US family. Under the deal, a crackdown on tax loopholes is envisaged and multinationals with operations on either side of the two big oceans would appear, at first sight, to be heavily exposed, and along with them, the countries which have promoted themselves as tax havens.

The New York Times has predicted that “the House plan will ignite a legislative and lobbying fight as Democrats, business groups and other special interests tear into the text ahead of a GOP sprint to get the legislation passed and on to Trump’s desk (for signature) by Christmas”.

Elsewhere, the mood is one of nervousness in countries which count as major recipients of US foreign direct investment. According to the Sydney Morning Herald, the plan would give a “one-time tax holiday to companies like Apple and Microsoft” as they return funds to the US.

This in itself would not be a game changer given the sheer scale of the funds held. However, the paper goes on to predict that “the reforms make the US a much more attractive place in which to invest relative to high taxing countries like Australia”.

Fortunately for Ireland, the country has held to its commitment with respect to the 12.5% corporation tax rate, but events in Athenry and on the US west coast should serve as a reminder that preserving a particular tax rate will no longer suffice on its own when it comes to the attraction of major projects.

The data centre planning delay, in fact, raises a number of questions.

For a start, should we be going all out to be attracting such energy-guzzling projects to our shores at a time when we are on course to break our commitments with respect to carbon emissions?

Is this yet another example of the right hand in Government not really knowing what the left hand is up to?

But if the Athenry project stood out as a game changer in terms of attracting investments to the west of Ireland, what does its frustration tell us about the operation of the planning laws?

It appears that the blame for many of the delays that have occurred can be laid at the door of the courts system which raises a whole series of further questions. The courts have benefited from considerable investment in recent years, in new technology and new courthouse facilities.

A new layer of the judiciary, the Court of Appeal, has been established, and many new judges have been appointed to the Circuit and High Court. Some years ago, the Commercial Court was established with the aim of streamlining processes, an aim which was in large part fulfilled, yet the delays persist.

The harsh fact is that the country’s competitiveness is being seriously affected by blockages in the legal system.

No one questions the efforts made to promote investment in Ireland, but for a promotional strategy to remain successful, there is a need for the proper infrastructure, and one is not just talking about football stadia.

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