Fed official slams US tax cuts for imperiling economy

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One of the Federal Reserve’s most influential members on Thursday offered a point-by-point critique of US President Donald Trump’s tax cuts, warning they put the country on an unsustainable fiscal path that will imperil long-term economic stability.

New York Fed President William Dudley 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 US creditworthiness, it is unlikely to bring about spending since corporations and the rich benefit the most, he said.

The comments from Dudley suggest that central bankers will not hesitate to criticize the tax plan’s timing and the economic assumptions of its Republican backers.

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

New York Fed President William Dudley / Reuters Photo.

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 reduces individual rates mostly for higher-income households in what the administration argues will boost both business and consumer spending.

Yet with 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 dollars.

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.

Source(s): Reuters