Benefits from tax-cuts are likely to be short-lived

Economists opine that the 3 projected hikes in interest rates this year by the Feds could potentially offset the short term benefits of these tax cuts, which could in turn dampen the United States’ economic growth.

A poll conducted by Reuters involving major economists has concluded that although the U.S. economy is set to grow at its fastest pace in 2018, in the last three years, the results are expected mostly to have a short term benefit.

Although the $1.5 trillion tax package that U.S. President Donald Trump signed into law on December 22 did not elicit any major reaction from the markets, it however did provide a significant lift to the U.S. economy.

At the same time, economists do not expect the Federal Reserve to deviate from its current guidance of having 3 interest rate hikes in 2018.

Economists expect the gross domestic product of the country to expand by 2.6% this year, in comparison to 2.4% last year. In 2015, the U.S. economy grew by 2.9%.

The majority of the economists polled opined that the tax cuts might prove to be short lived.

“We will likely see a sugar-rush from the tax cuts in early 2018 that fades and offers limited longer-term impact,” said Janney Montgomery Scott, Chief Fixed Income Strategist at Guy LeBas.

Nevertheless, the optimism surrounding the tax cuts have pushed consumer confidence with more than 50% of the respondents seeing a rise in their 2018 growth forecast.

“This upgrade (to growth forecasts) shows up primarily as a lift to consumer spending and business investment, as lower average tax rates for businesses and households enable them to spend more,” wrote Beata Caranci, Chief Economist at TD Bank Group in a note to clients.

They however expect the effect of the tax cut to be short lived and expect a slowdown in the country’s economic growth to 2.2% in 2019, which is in line with the views of the Fed’s policy committee members.

They have forecast the jobless rate to average at 3.9% in 2018 and 3.8% in 2019, down from the current 4.1%.

Much like in the past, an increase in the employment rate is not expected to translate to higher pay and economists have forecast that the Feds will maintain inflation levels to below the 2% target for the bulk of 2018.

Significantly, while the Fed kept interest rates unchanged at its last policy meeting on January 31, economists expect that a 25-basis-point hike is likely to occur as early as March 2019.

After March, they expect the Fed to raise interest rates twice in 2018 and expect interest rates to be at 2.00% to 2.25% by the end of December 2018.

According to some economists, the anticipated pace of rate increase, could potentially offset the tax cuts’ economic benefits.

“Given the economy is running nearly full tilt, fiscal stimulus is likely a stoke to higher wages and inflation,” said Caranci. “That could result in a slightly faster pace of rate hikes by the Federal Reserve, ultimately dampening the support to growth.”

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