Charles L. Evans, president and CEO of the Federal Reserve Bank of Chicago, talked about the tax bump today at the Iowa Bankers Association Bank Management Conference in Des Moines: “In January we asked our Beige Book contacts about the likely impact of the tax package on their businesses. Their responses indicated that, on average, about a quarter of tax savings is expected to go toward capital spending and about 15 percent to labor. Most of the remaining 60 percent is planned to be used to pay down debt, fund mergers and acquisitions, and return funds to shareholders.
“How all these various activities will translate into GDP growth is highly uncertain. Still, by most analyses, the Act should boost aggregate activity in the near and medium terms. The estimates for 2018 generally range between 0.4 and 0.8 percent.”
Longer term impacts are unclear, Evans said, because growth depends upon available labor, capital stock and technology.
Evans said he expects GDP growth in 2018 to be in the 2.5 to 2.75 percent range. As the tax bump wears off, growth will slow into 2019 and beyond, he predicted. Any gains, he added, “should be benchmarked against the underlying trend in GDP growth, which my staff estimates will be between 1.75 and 2 percent.”
Evans said he expected the unemployment rate, currently at 4.3 percent, to decline to 3.5 percent by the end of 2020. He also said he expects inflation to rise gradually over the next few years. Current core consumer inflation is 1.5 percent.