- President Biden tonight is expected to outline American Families plan with capital gains tax hikeÂ
- U.S. 7-day daily Covid infection rate falls to 1-month low
- FOMC expected to leave policy stance unchanged
President Biden tonight is expected to outline American Families plan with capital gains tax hike — President Biden in tonight’s joint address to Congress is expected to announce his American Families Plan, which involves a large amount of social spending on education, increased child credits, and a raft of other measures. The bill will be paid for with increased taxes on those earning over $400,000.
The stock market last Thursday took a hit of about -1% after Bloomberg reported that the Biden administration will propose raising the capital gains tax to 39.6% from 20% for taxpayers earning more than $1 million per year. The capital gains tax would be above 40% after adding in the existing Obamacare surtax on investment income and state taxes.
Other tax hikes in the bill are expected to be an increase in tax brackets for people making over $400,000, higher estate tax measures (e.g., the elimination of the step-up basis), restrictions on carried interest, and other measures.
The reported capital gains tax proposal was in line with President Biden’s campaign platform and wasn’t any big surprise. Nevertheless, the markets are worried that wealthy investors might start dumping their stocks later this year to beat the tax hike, assuming that it begins January 1, 2022. However, it is possible that the tax hike would be retroactive to the beginning of 2021, in which case selling stocks wouldn’t save any money on taxes.
In any case, a higher tax on stock gains would make stocks somewhat less attractive as an investment and could compress P/E ratios.
House Speaker Pelosi has said that the House plans to pass the American Families Plan separately from the $2.25 trillion infrastructure plan, which is being called the American Jobs Plan. Ms. Pelosi wants the House to pass the American Jobs Plan by July 4th, and is hoping that the Senate will pass that bill before its August recess.
Passage of the American Family Plan will likely have to wait until autumn or early winter since it will be more contentious. There is still a possibility, however, that both bills will be combined into one massive package.
U.S. 7-day daily Covid infection rate falls to 1-month low — The 7-day average of new daily U.S. Covid infections on Monday fell to a 1-month low of 55,289. That was just mildly above the 6-1/2 month low of 51,820 posted in mid-March. The 7-day average on Monday was down sharply by -18% from the week earlier level, showing the downward momentum in new infections.
In some even better news, the 7-day average of new daily U.S. Covid deaths on Monday fell to a 6-1/2 month low of 711. That was the lowest figure since last October. The low level of deaths can be attributed to (1) the reduced level of overall new Covid infections, and (2) the fact that 68% of the U.S. population over 65 years old has been fully vaccinated (82% have received at least one dose).
FOMC expected to leave policy stance unchanged — The markets are expecting the FOMC at its 2-day meeting that concludes today to leave its policy variables unchanged and simply reiterate its recent themes. The FOMC at this week’s meeting will not be providing an updated Summary of Economic Projections, which means there will not be a new Fed-dot forecast of the funds rate.
Fed officials in recent weeks have taken pains to remain dovish and reassure the markets that the Fed is not even thinking about tapering its QE program or raising interest rates. Fed Chair Powell recently reiterated that the Fed will not consider tapering its QE program until “we’ve made substantial further progress towards our goals” on inflation and employment.
A recent survey by Bloomberg found that the markets are expecting the Fed to start tapering when the unemployment rate has fallen to around 4.5%, and PCE deflator has risen to +2.1%. The unemployment rate is currently at 6.0%. The PCE deflator in February was at +1.6% y/y and the core deflator was at +1.4% y/y. On a 3-month annualized basis, however, the deflator in February was up +3.8% and the core deflator was up +2.5%.
Mr. Powell said that QE tapering would “in all likelihood be before, well before, the time we consider raising interest rates.” The Bloomberg survey found that 14% of the analysts surveyed expect the Fed to start tapering its QE program in Q3, and 45% of the analysts expect tapering to begin in Q4. Opportunities for the Fed to announce the tapering could come as soon as the July or September FOMC meetings or at the Fed’s late-August Jackson Hole conference. The consensus is for the tapering to last 7-12 months.
The market is not expecting the Fed to start raising rates until early 2023. The Bloomberg survey found a consensus for two +25 bp rate hikes in 2023 that would bring the funds rate target up to 0.50%/0.75% from the current level of 0%-0.25%.
The market expectation is more hawkish than the Fed-dot forecast, where the consensus among FOMC members is that the funds rate will remain unchanged through the end of 2023. However, there are a number of FOMC members that are more hawkish than their colleagues, with 4 of the 18 FOMC members expecting at least one rate hike in 2022 and 7 of the 18 FOMC members expecting one or more rate hikes by 2023.
