Key Fed official slams U.S. tax cuts for imperiling economy

Key Fed official slams U.S. tax cuts for imperiling economy
# 11 January 2018 23:19 (UTC +04:00)

One of the Federal Reserve’s most influential members on Thursday offered a point-by-point critique of U.S. President Donald Trump’s sweeping tax cuts, warning they put the country on an unsustainable fiscal path that will imperil the economy’s stability down the road, APA reports citing Reuters.


New York Fed President William Dudley, a key architect of the U.S. central bank’s decade-long response to the financial crisis, said the new cuts to corporate and individual taxes will provide a short-term boost but leave the economy more vulnerable in the years to come. Not only could the bill eventually hurt U.S. creditworthiness, it is unlikely to bring about spending since corporations and the rich benefit the most, he said.

The comments from Dudley - in which he maintained a “strong case” for the Fed to keep gradually raising interest rates - suggest that while the central bank has little reason to curb the fiscal stimulus, its policymakers will not hesitate to criticize its timing and the economic assumptions of its Republican backers.

“The economy has considerable forward momentum, monetary policy is still accommodative, financial conditions are easy, and fiscal policy is set to provide a boost. But, there are some significant storm clouds over the longer term,” Dudley, who is set to step down in mid-2018, told a Wall Street forum hosted by SIFMA.

The tax cuts, he said, “will come at a cost. After all, there is no such thing as a free lunch.”

The legislation was signed into law last month as Trump’s first significant accomplishment as president.

It slashes corporate income tax by 14 percentage points and reduce individual rates mostly for higher-income households in what the administration argues will boost both business and consumer spending.

Yet with U.S. unemployment low and economic growth robust, the bill could provide only a modest boost and, over 10 years, it is expected to balloon the deficit by $1.5 trillion.

Dudley, a permanent voting member on the Fed’s monetary policy committee and a close ally of outgoing Fed Chair Janet Yellen, said record-breaking financial markets appear unconcerned that “the current fiscal path is unsustainable.” That means private investment could be crowded out, possibly eclipsing benefits from capital spending and potential output.

He noted that corporations and higher-income Americans are less inclined to spend, suggesting “a significant portion of the tax cuts will be saved not spent.” Zeroing in on a new cap on deducting state and local taxes, Dudley said the bill raises the cost of owning expensive properties in some areas and could diminish construction and prices.

“Over the longer term I am considerably more cautious about the economic outlook,” said Dudley, who last year also criticized the White House’s efforts to erect trade barriers. “Keeping the economy on a sustainable path may become more challenging” for the Fed due to the risk of “overheating,” he added.

The central bank raised rates three times in 2017 and aims to do the same this year even while inflation has remained below a 2-percent target for more than five years.

Dudley repeated he expects prices to rebound this year toward the target, and said 2018 should be “a good year” for the economy. He boosted his GDP expectations to between 2.5 to 2.75 percent growth, mostly due to the tax cuts.

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