Why the Tax bill could be bad for the US economy

00:00 Brian Sozzi

Jennifer, good to see you. Thank you so much for taking the time here with us, pre-market. Just take us into your assessment of the additive costs that this tax bill based on estimates that are floating around would ultimately mean for the economy and how investors should be thinking through that.

00:33 Jennifer Lee

Uh good morning and thanks very much for having me on. You know, this is a not a shock that we’re going to be seeing trillions and trillions of dollars added to the bottom line. And uh in terms of what it means for the economy, this is uh, you know, not great news for the economy and the same time everyone’s watching ever since you know Moody’s took away that final triple A rating. You know, there’s look, there have been a lot more eyeballs on the US fiscal deficit side of the page. And foreign and foreign investors are looking in domestic investors as well. Seeing how much um um the US is able to rain in their spending, how much control they have over their spending and whether or not they are able to do so and if they can’t. Obviously we’re going to see debt to GDP rise debt to GDP interest payments rising as well. Um and then of course this means ultimately longer uh longer term yields on the higher side. And that’s uh that means higher borrowing costs for consumers in terms of credit cards and mortgages and auto loans and all that sort of stuff. So overall, uh, broadly speaking not good news for the US economy longer term.

02:46 Brian Sozzi

What’s that read through do you think for the Fed if, if that means that the costs for for consumers, essentially at the end of the day for being able to, you know, take out or get loans for very high ticket purchases, or even high equity purchases, things like homes, especially as the Fed is reading through the affordability crisis for the housing market right now. What, what is the Fed’s assessment here if this is a longer term implication?

03:44 Jennifer Lee

Um, another headache for the Federal Reserve. Uh, clearly to think about but right now they are more focused, I think, on the here and now, you know, what’s happening with the economy, what’s happening with the labor market, and we’re going to get a glimpse of that later on this week. And of course what’s happening with the read through of tariffs on inflation and it makes their job, Fed Chair Powell’s job, much more difficult in terms of how to um um move going forward. Um, you know, we are by the way, uh still looking for a couple of rate cuts this year starting in September. If I had to lean in a certain direction if I had to say there was a risk, there may be a risk that they may be waiting a bit longer. Again, waiting to see what the fallout of tariffs will be. So, again, also another headache for the Fred, for the Federal Reserve, and especially for Fed Chair Powell.

05:06 Brian Sozzi

Jennifer, I wonder how you and your team, as you as you were mentioning the impact of tariffs and what that could potentially mean for inflation. I wonder how you and your team are running the calculus, or any modeling around what the anticipated average tariff rate could be, and what it needs to be to in order to do what the Trump administration has been saying in terms of the tariffs countering some of the costs of this tax bill?

05:50 Jennifer Lee

That is a very difficult one to model. I mean because we’ve never been through this sort of situation before, but ultimately, I mean you have to think that this is going to have some sort of inflationary impact, which is going to slow down consumer spending. We started off the year at what, 2%? A 2% average effective tariff rate. Went as high as 26%, the highest in over a century. Now we’re down to about, I think it’s like 15, 16% thereabouts. So we’re still roughly eight times where we were at the start of the year. So that is going to have that sort of inflationary impact. We’re still waiting for that to, to, to flow through. I’ve been a little bit stunned, quite frankly, that you know, we haven’t seen it come through yet, but I think there are a number of factors in play as to why that, that is the case, but Fed Chair Powell also sort of gave a little bit of a time frame, I think um uh last week, when he said we’d have to wait a couple of months to see what the impact of tariffs will be. So, I think, I think he said summer, um late summer, or something like that. So, I think September, you know, we’re still pretty comfortable with for now.