Business Monday

Trump, taxes and a collision course with the Federal Reserve

President Donald Trump and Senate Majority Leader Mitch McConnell, R-Ky., left, arrive on Capitol Hill to have lunch with Senate Republicans and push for the tax reform agenda on Tuesday.
President Donald Trump and Senate Majority Leader Mitch McConnell, R-Ky., left, arrive on Capitol Hill to have lunch with Senate Republicans and push for the tax reform agenda on Tuesday. AP

For years, as the economy struggled to gain steam after the Great Recession, the Federal Reserve was pumping billions of dollars into it.

The federal government, meantime, was stuck. Congressional Republicans and President Barack Obama hit stalemate after stalemate on spending policies. Government shutdowns and debt showdowns left the central bank alone in trying to goose the economy.

It worked, at least as reflected in the headline economic data and the stock market’s record highs.

But millions of working Americans haven’t experienced meaningful increases in real wages while millions more are discouraged enough to drop out of the job market altogether.

Paying for this will require the government to borrow more money unless it wants to cut spending (which it won’t). That means the government will have to sell more bonds at the same time a huge bondholder is no longer a big buyer.

Now, Congressional GOP leaders and President Donald Trump are pushing a once-in-a-generation opportunity for tax reform.

Exactly what will be in that reform is expected to be released in draft form on Wednesday in the week ahead.

The early framework includes reducing the number of tax brackets, doubling the standard deduction and maybe limiting the deduction for state and local taxes.

The package also may include caps on how much pre-tax money workers may contribute to their 401(k) retirement plans.

For companies, supporters want to lower the corporate tax rate from 35 percent to 20 percent.

Paying for this will require the government to borrow more money unless it wants to cut spending (which it won’t). That means the government will have to sell more bonds at the same time a huge bondholder is no longer a big buyer.

About half of the Federal Reserve’s $4 trillion bond portfolio is made up of IOUs from the federal government. It bought them to help push down interest rates. It worked.

But now the Fed has stopped buying new bonds as it hopes to normalize its monetary role.

More selling and less buying may lead interest rates to increase and bond prices to drop.

The net effect on the economy could run counter to the goals of the president and the central bank.

Tom Hudson hosts ‘The Sunshine Economy’ on WLRN-FM; @HudsonsView.

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