On Sunday, August 7th, the US Senate narrowly passed a budget reconciliation bill, coined the ‘Inflation Reduction Act’, by a vote of 51-50, with Vice President Kamala Harris breaking a tie. It primarily focuses on three goals: combatting climate change, expanding health insurance coverage, and reforming the tax code to reduce deficit spending. A heavily pared down incarnation of the discarded Build Back Better Act, it is expected to pass in the House of Representatives by the end of this week before being signed into effect by President Biden.
Provisions That Would Supposedly Curb Inflation
The legislation has been particularly marketed by Senator Joe Manchin (D-WV), one of its sponsors, as a means of subduing the 40-year high inflation rates currently gripping the US. The bill would allegedly do this by creating a new 15% corporate minimum tax to close existing loopholes, increasing funding for the IRS to enable higher auditing capacity, and introducing a 1% excise tax for stock buybacks. Between these measures, as well as enabling Medicare to eventually negotiate lower prices for a selection of prescription drugs, an estimated $700+ billion in additional revenue will be raised over a ten-year period. Of these funds, $300 billion will be used in lieu of current deficit spending, theoretically reducing the anticipated national debt increases as well.
Merits and Criticisms of These Claims
An optimistic outlook regarding the possible efficacy of these provisions in curbing inflation rates could highlight the reduction in capital that larger corporations would have available to allocate (for example, Amazon, FedEx, Unum, and many more companies have paid effective corporate income tax rates either at or below 0% in recent years). Net corporate subsidies stimulate the economy, increasing growth and thus inflation, while net corporate taxes restrict it.
However, a more skeptical outlook confronts the likely insignificance of these decreases in the deficit over a ten-year period. Given the United States’ $25 trillion GDP, penchant for trillion-dollar federal budget deficits, $30+ trillion national debt, and the effects of $8.9 trillion in mid-pandemic quantitative easing, a $300 billion promise in federal savings over a ten-year period is rather negligible. Slowing additions to the money supply by a fraction of a percent of GDP will likely not have much of an effect on slowing year-over-year inflation nearing double digits.
Potential Effects on Major Pairs
While it is difficult to say for certain, I am anticipating that if this legislation is signed into law, it will have either a minimal or virtually no effect on inflation and most USD fundamentals. I am personally maintaining my bullish bias on USD, and currently have open positions selling AUD/USD, NZD/USD, and buying USD/CHF. For those who are interested in finding supplemental analysis tools for gauging pair fundamentals and sentiment, consider investing in the EdgeFinder, a robust market scanner from A1 Trading.
Yesterday, the Federal Open Market Committee (FOMC), the Federal Reserve’s policy-making body, implemented yet another 75 basis point interest rate hike. While this move was perfectly in line with market forecasts, Chair Powell’s comments following the subsequent press conference, in which he discussed the FOMC’s new set of economic projections, were significant. He continued to […]
Statistics Canada released a surprising new batch of inflation data this morning: month-over-month CPI failed to meet market forecasts, declining by 0.3% instead of the anticipated 0.1%. Rather than being an outlier, the other measurements of CPI mostly followed suit, as both year-over-year Trimmed CPI and Median CPI likewise failed to meet expectations. Trimmed CPI’s […]
At 9:30 pm Eastern Time tonight, the Reserve Bank of Australia (RBA) will be publishing their latest round of monetary policy meeting minutes. While there is a chance that their intentions could come across as more hawkish than expected, they currently have little reason to be. Despite relatively low unemployment at 3.5%, steady GDP growth, […]
DISCLAIMER: All comments made by TraderNick’s Forex Group, LLC are for educational and informational purposes only. All comments should not be construed as investment advice regarding the purchase or sale of any securities or financial instrument of any kind. Please consult with your financial adviser before making an investment decision regarding any securities or financial instruments mentioned by TraderNick’s Forex Group, LLC. TraderNick’s Forex Group, LLC assumes no responsibility for your trading and investment results. All information on any of the platforms utilized by TraderNick’s Forex Group, LLC was obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. TraderNick’s Forex Group, LLC, its employees, representatives, and affiliated individuals may have a position or effect transactions in the securities and financial instruments herein and or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies. Trading of any type involves very high risk and may not be suitable for all investors. TraderNick’s Forex Group, LLC, its subsidiaries and all affiliated individuals assume no responsibility for your trading and investment result. Read our full disclaimer here