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US economy can ‘definitely’ withstand tax hikes, BlackRock’s Rick Rieder says




But Rieder, BlackRock’s top global fixed income investment director, doesn’t think reversing Trump’s tax cuts would be debilitating for the economy – it could actually be positive for growth.

“I think 21% is too low,” Rieder said in the interview. He noted how many companies used their tax savings to recover shares as proof that the profit for the business is “too high.”

During the 2020 campaign, Joe Biden proposed raising the corporate tax rate to 28%, which is still below the pre-Trump level of 35%. Earlier this week, White House press secretary Jen Psaki said the president believes “those at the top are not doing their part” and “obviously companies could be paying higher taxes “.

Rieder said the U.S. economy can “definitely” support higher corporate taxes and suggested that raising the corporate tax rate could help ensure that economic gains are more evenly distributed among companies and workers.

“The U.S. economy is incredibly resilient,” he said, “and in fact it will perform well when you get some of that revenue redistribution and consumption in an easier and better place, especially for low- and middle-income earners. “.

Pay off a mountain of debt

Last week, the Business Roundtable, a powerful alliance of CEOs, warned that raising the corporate tax rate would make U.S. companies uncompetitive on the global corporate tax rate. so that recovery gains strength.

“The roundtable will actively oppose efforts to raise corporate taxes,” Josh Bolten, the group’s CEO, told a news conference.

But Rieder of BlackRock suggested those concerns are exaggerated and do not explain the benefit of the additional tax revenue after Washington accumulated billions in debt to fight the pandemic.

Rieder said that modestly raising the corporate rate “does not really affect the cash flows” of companies and “allows us to maintain a lower debt profile for the country as a whole.”

The Fed could start shrinking very soon

Economists have been improving its US GDP forecasts since Congress approved the $ 1.9 trillion Biden stimulus package. Rieder shares this optimism, predicting that the U.S. economy will grow at an average rate of 7% this year, a rate not seen since 1984.

“I think it will surprise people to the brim,” Rieder said. “You will see quite boom growth for the economy.”

He added that “it’s been a long time” since he felt so optimistic about the US economy.

Forecasts for an economic boom are putting pressure on the Federal Reserve to begin easing its emergency stance, before the economy overheats. Not only are interest rates zero, but the Fed continues to buy $ 120 billion in bonds every month.

Rieder believes the Fed will begin reducing the size of its asset purchases by September. This news could come so soon Wednesday.

“I think they should start cutting back on programs soon,” he said.

Rieder added that he expects the Fed to start raising minimum interest rates next year. This is well ahead of the Fed most recent orientation. In December, long before the Biden stimulus plan and the acceleration of vaccine deployment, most Fed officials indicated that the central bank would not raise rates until 2024.

Fed withdrawal plans can scare away investors who have become accustomed to extremely low interest rates. But Rieder put those worries aside.

“It will not hurt the economy. In fact, in many ways it helps consumers and helps savers” hurt by low interest rates on money sitting in the bank, he said.

Fleeing inflation? Not too fast

Indicating the end of its crisis-era policies will also help the Fed control inflation.

“As a central bank, you don’t want to fight back to try to curb inflation. It’s much more effective to be ahead and come up with the plan.”

Inflation is now the number 1 fear among portfolio managers surveyed by Bank of America. It is the first time since February 2020 that Covid is not the most cited risk in the survey.

The big concern is that runaway inflation like the 1970s will force the Fed to raise interest rates rapidly, stifling economic recovery.

Wall Street is already looking at Biden’s next $ 1 trillion spending plan

Although Rieder sees inflation accelerating, perhaps to 2.5% year-on-year, he is not worried about “explosive” price gains.

“I don’t think inflation is escaping at all,” he said. “In fact, I think the cultural differences around inflation compared to the 70s and 80s are immense.”

In particular, he noted the role of technology, in which everything from Amazon and Uber to cloud computing maintains price coverage.

“The way people go, how they buy and find prices at better levels,” Rieder said. “In addition, we no longer manage a commodity-oriented manufacturing economy.”