Trump Needs 1 More Piece for Economic Agenda to Work. He May Not Get It.

President Donald Trump speaks at an event promoting his tax bill in late June. (Chip Somodevilla/Getty Images)

President Donald Trump’s domestic agenda got an enormous boost Thursday as House lawmakers approved his multitrillion tax and spending bill despite the objections of conservative Republicans concerned about its impact on the deficit.

The president laid out his case for the legislation, which makes tax cuts from his first term in office permanent while making notable reductions to Medicaid and other social benefits, in a social media post aimed at recalcitrant lawmakers.

“Largest Tax Cuts in History and a Booming Economy vs. Biggest Tax Increase in History, and a Failed Economy,” Trump said before the vote. “What are the Republicans waiting for???”

While the stock market is certainly booming, with the S&P 500 near record levels, the economy isn’t. It could take lower interest rates, which Federal Reserve Chair Jerome Powell is in no rush to provide, to make that happen.

The Atlanta Fed’s GDPNow forecasting tool suggests a current-quarter growth rate of 2.6% following a 0.5% contraction over the first three months of the year. And while the Labor Department’s June jobs report showed better-than-expected hiring gains of 147,000, it also included the smallest private-sector increase since October.

The Institute for Supply Management’s benchmark survey of business activity in the services sector, the economy’s biggest source of growth, nudged back into expansion territory, respondents remained concerned about tariffs.

Lower interest rates could help improve those numbers. They would also be important for the fiscal picture after the tax bill is signed into law. The nonpartisan Congressional Budget Office says it will add another $3.3 trillion to U.S. debt levels, and thus will necessitate more Treasury bond issuance, over the next 10 years. Lower rates would theoretically lower the government’s interest costs.

Better economic growth rates could also lower the ratio of the national debt to U.S. gross domestic product, a widely accepted metric, but that is no certainty.

The White House’s Council of Economic Advisers say the growth will be between 2.4% and 2.7% higher that it normally would be over the next decade thanks to the tax legislation. The CBO puts the extra gain at around 0.4%.

While Thursday’s jobs report crushed any chance of a rate cut when the Fed meets later this month in Washington, the odds of a September reduction are still solid, based on the CME Group’s FedWatch Tool. A move lower in December is possible as well.

But that isn‘t likely to be enough for the president, particularly if bond yields start to rise in response to the bigger budget deficits implied by the tax bill, or because of renewed uncertainty about tariffs over the summer.

The problem for the president is that even though his administration continues to pile pressure on Powell, and the Fed in general, the central bank doesn’t seem likely to give in.

“Clearly, the intent of the Trump administration is to engineer low rates by appointing a complicit Fed Chair to replace Powell, to heck with inflation levels, ” said John Hardy, Saxo Bank’s global head of macro strategy.

But it doesn’t seem possible for Trump to get rid of the Fed chairman. A recent Supreme Court ruling appeared to make it clear that Powell can’t be fired without cause.

Although Bill Pulte, who runs the Federal Housing Finance Agency, leaned in the direction of identifying such a cause on Wednesday—he accused Powell of misleading Congress over renovations to the Federal Reserve headquarters and Trump said Powell should “resign immediately”—the market wouldn’t take a firing sitting down.

Any effort to remove the Fed chair before his term expires in May likely would unsettle financial markets. Bond yields would rise, keeping mortgage rates and consumer loan costs elevated. Stocks would likely fall.

That would reduce the benefits of Trump’s tax cuts, as well as the chances of the rate cuts he has been pushing so hard for.

Write to Martin Baccardax at martin.baccardax@barrons.com