- Jan 14, 2016
New York Federal Reserve Bank President William Dudley gives Trump a lesson in basic economics - The rich spend very little of any extra income you give them.
New York Fed President William Dudley, a key architect of the U.S. central bank’s decade-long response to the financial crisis, said the new cuts to corporate and individual taxes will provide a short-term boost but leave the economy more vulnerable in the years to come. Not only could the bill eventually hurt U.S. creditworthiness, it is unlikely to bring about spending since corporations and the rich benefit the most, he said.
The comments from Dudley - in which he maintained a “strong case” for the Fed to keep gradually raising interest rates - suggest that central bankers will not hesitate to criticize the tax plan’s timing and the economic assumptions of its Republican backers. Other Fed officials have also raised alarms on the longer-term costs of the bill, though interviews with several of them in recent days suggest there is no appetite to adopt more or less aggressive rate hikes just yet.
“The economy has considerable forward momentum, monetary policy is still accommodative, financial conditions are easy, and fiscal policy is set to provide a boost. But, there are some significant storm clouds over the longer term,” Dudley, who is set to step down in mid-2018, told a Wall Street forum hosted by SIFMA.
The tax cuts, he said, “will come at a cost. After all, there is no such thing as a free lunch.”
Yet with U.S. unemployment low and economic growth robust, the bill could provide only a modest boost and, over 10 years, it is expected to balloon the deficit by $1.5 trillion.
Dudley, a permanent voting member on the Fed’s monetary policy committee and a close ally of outgoing Fed Chair Janet Yellen, said record-breaking financial markets appear unconcerned that “the current fiscal path is unsustainable.” That means private investment could be crowded out, possibly eclipsing benefits from capital spending and potential output.
He noted that corporations and higher-income Americans are less inclined to spend, suggesting “a significant portion of the tax cuts will be saved not spent.” Zeroing in on a new cap on deducting state and local taxes, Dudley said the bill raises the cost of owning expensive properties in some areas and could diminish construction and prices.
“Over the longer term I am considerably more cautious about the economic outlook,” said Dudley, who last year also criticized the White House’s efforts to erect trade barriers. “Keeping the economy on a sustainable path may become more challenging” for the Fed due to the risk of “overheating,” he added.
Key Fed official slams U.S. tax cuts for imperiling economy