But Rieder, director of global fixed-income investments at BlackRock, doesn’t think reversing Trump’s tax cuts will be debilitating for the economy – in fact, it could be positive for growth.
“I think 21% is very low,” said Rieder in the interview. He pointed out how many companies used their tax savings to buy back shares as evidence that the benefit to companies is “very high”.
Rieder said the US economy could “definitely” support higher corporate taxes and suggested that raising the corporate rate could help ensure that economic gains are distributed more evenly between companies and workers.
“The US economy is surprisingly resilient,” he said, “and it will actually perform well when you get part of that income and consumption redistribution in an easier and better place, especially for middle and lower incomes.”
Paying off a mountain of debt
Last week, Business Roundtable, a powerful alliance of CEOs, warned that increasing the corporate tax rate would make American companies uncompetitive on the world stage as the recovery gains momentum.
“The Roundtable will actively oppose efforts to raise corporate taxes,” said Josh Bolten, the group’s CEO, during a news conference.
But BlackRock’s Rieder suggested that these concerns are overblown and do not represent the benefit of additional tax revenue after Washington accumulated trillions of debt to fight the pandemic.
Rieder said that modestly raising the corporate rate “does not really hurt cash flow” for companies and “allows us to maintain a lower debt profile for the country in general”.
The Fed may start to decline very soon
“I think it will surprise people in a positive way,” said Rieder. “You will see a very explosive growth for the economy.”
He added that “it has been a long time” since he felt optimistic about the United States economy.
Predictions of an economic boom are putting pressure on the Federal Reserve to begin to undo its emergency stance – before it overheats the economy. Not only are interest rates at zero, but the Fed is still buying $ 120 billion in bonds every month.
“I think they should start reducing programs soon,” he said.
The Fed’s take-off plans can scare investors who have gotten used to extremely low interest rates. But Rieder put these concerns aside.
“It will not hurt the economy. In fact, in many ways, it helps consumers and savers” by being hurt by low interest rates on money in the bank, he said.
Uncontrolled inflation? Not so fast
Signaling an end to its crisis-era policies will also help the Fed keep inflation under control.
“As a central bank, you don’t want to fight from behind to try to control inflation. It is much more effective to be ahead and outline the plan.”
The major concern is that rampant inflation like that of the 1970s will force the Fed to rapidly raise interest rates, extinguishing the economic recovery.
Although Rieder sees inflation accelerating, perhaps to 2.5% year on year, he is not concerned with “explosive” price gains.
“I don’t think inflation is going to escape,” he said. “In fact, I think the cultural differences around inflation compared to the 1970s and 1980s are huge.”
In particular, he pointed to the role of technology, in which everything from Amazon and Uber to cloud computing keeps control of prices.
“The way people spend, how they buy and find prices at better levels,” said Rieder. “In addition, we no longer have a commodity-oriented industrial economy.”