Cautious Confidence
We are dealing with the two events that are just weeks away in the election and the Fed meeting. A glimpse of what is to come in terms of acting on rates was provided by Chair Powell today in his Jackson Hole delivery. Barring any unforeseen economic data trends or other developments over the next couple of weeks, it is now quite clear that the easing process will begin at the September meeting. We may quibble about whether it will be a move of 25 or 50 basis points. What is more important is that the easing trajectory will begin.
The cautious aspect is that the pendulum has swung from intense focus on inflation to the health of the labor market. Hiring continues at a somewhat slower pace and there have been some layoffs but the level is not flashing red. The Fed’s other mandate will now command more attention going forward. It was not stated verbally in the delivery but it has become clear that the soft landing appears to be real.
On the election front, the promises and the potential handouts are becoming abundant. Since we just experienced the Democratic convention, the focus will be on those proposals. We appreciate that a major component of the overall inflation rate may be found in housing costs. I do believe that providing more tax credits and incentives to developers may prove to be highly effective. Also, lifting the private activity limits would be widely appreciated by all participants. The municipal market stands ready to help with the implementation of any of the proposed changes to ease the housing supply conditions. Lower mortgage rates are also quite beneficial.
Providing downpayment assistance of $25,000 to first time homebuyers is a wildly expensive proposition. I do not need to do the arithmetic tautology to prove the point. Of course, there is no direct mention of how this proposal would be paid for in budget terms. The design and implementation of such a program would also be a significant effort. Preventing fraud would need to be a focus. But more importantly, this and other expensive programs will be most difficult to attain approval for if Congress remains controlled by Republicans.
And there really has not been any meaningful discussion of reducing the deficit and slowing the mounting debt. The mantra is to get elected first and worry about the policy implications later.
Providing a more generous child tax credit has merit but how will it be offset in the budget? Another proposal that is a favorite of the municipal market is to restore the state and local tax deduction or SALT. One report pegs the cost at $1 trillion over a decade.
Part of the retort to all the associated costs is that taxes will need to be increased. That is correct. We would return to the top bracket of 39.6%. Demand for municipal bonds would climb but what about all the other effects? Medicare surtaxes are also a candidate to be increased.
Now many pundits would say it would be easier to raise the corporate tax rate back up to a proposed rate of 28% versus 21%. That would bring in substantial dollars to the Treasury but what would it do for our competitiveness in the world? Raising the stock buyback tax and imposing a 15% minimum tax fall into the same category and raise similar concerns. The other party is diametrically opposite in outlook and proposes lowering the corporate tax rate to 15%. Once again, what are the effects on the budget, the deficit, and the national debt?
Some of the proposals that would affect investing are also concerning. Taxing capital gains at a higher rate or at the same rate as the personal rate may have unintended consequences as in putting a damper on investing. Taxing unrealized gains would also be an accountant’s dream. But we will put aside the discussion for the moment that we do not have enough accountants.
I and others have suggested that the tax exemption for public purpose municipal bonds may be on the table once again. I hope the industry’s lobbyists and proponents are on high alert.
Many of these important debate items and factors will just have to wait until after the election. The order has been sustained: election first with details to follow.
John Hallacy
Recent Comments