Fed’s Policy Likely Will Mute Positive Effects of Tax Cuts

By Rob Willams – Re-Blogged From Newsmax

President Donald Trump’s tax cuts that went into effect this year will have a muted positive effect on the economy as the Federal Reserve raises interest rates and reduces its debt holdings, Hoisington Investment Management Co. said.

“The full spectrum of monetary policy is aligned against stronger growth in 2018,” chief investment officer Van Hoisington and economist Lacy Hunt said in a Jan. 11 report. “This monetary environment coupled with a heavily indebted economy, a low-saving consumer and well-known existing conditions of poor demographics suggest 2018 will bring economic disappointments.”

Consumers are bingeing on credit card debt to maintain their lifestyles while wages haven’t grown much compared with inflation, Hoisington said. Meanwhile, the Fed will have a significant effect on the economy as it seeks to reverse years of buying Treasurys and mortgage debt to push down interest rates, a process known as “quantitative easing.” Debt prices move in the opposite direction of interest rates.

“Although the economy may slow due to a poor consumer spending outlook and increases in debt, the real roadblock for economic acceleration in 2018 is past, present and possibly future monetary policy actions,” Hoisington said. “The impact of this tightened Fed policy on money, credit and eventually economic growth is slow but inexorable. The brunt of these past and current policy moves will be felt in 2018.”

The Fed began raising interest rates from record lows in 2015 as the U.S. economy showed signs of stable growth and falling unemployment. Wall Street economists forecast that the central bank will raise rates three times this year from the current target of 1.25 percent to 1.5 percent.

 The Fed’s reduction of its debt holdings will reduce the money supply and weigh on economic growth this year, possibly pressuring it to less than 4 percent, Hoisington said.

“It is important to note that historical comparisons and analysis are unavailable as the magnitude of this balance sheet reduction is unprecedented,” according to the report.

Trump’s sweeping reform cut rates for businesses and many individuals but also reduced deductions for state and local taxes and mortgage interest, which may mean that homeowners in high-state tax states like California and New York end up paying more. Treasury Secretary Steven Mnuchin on Friday said the plan assumes economic growth of 2.9 percent a year for modeling purposes, but “we do think we can get to three percent or higher,” Reuters reported.

 Hoisington said the tax cuts will add to the federal debt and will have a muted effect on growth. The Joint Committee on Taxation expects the federal deficit to increase by $1.1 trillion over 10 years, while the non-partisan Congressional Budget Office forecasts a $1.5 trillion shortfall.

“Although individual winners and losers may arise, a debt-financed tax cut will provide no net aggregate benefit to the macro-economy,” the firm’s report said. “If the tax cuts were instead to be financed by a reduction in expenditures (revenue-neutral), then the economic growth rate would benefit to a minor degree.”

 The private sector is more efficient and productive than the government, whose debt weighs on economic growth, Hoisington said. Trump’s tax cuts aren’t likely to be as effective at boosting growth as President Ronald Reagan’s were in the 1980s.

“When President Reagan cuts cut taxes in 1981 growth ensued, but the government debt was only 31 percent of GDP, an economic millennium from our present 106 percent,” Hoisington said. “A debt level above 90 percent has been shown to diminish an economy’s trend rate of growth by one-third or more.”

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One thought on “Fed’s Policy Likely Will Mute Positive Effects of Tax Cuts

  1. I am not certain the place you’re getting your info, however great topic. I must spend a while learning more or working out more. Thank you for fantastic info I used to be in search of this info for my mission.

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