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Will President Donald Trump’s massive tax bill passed in July be more far-reaching than policymakers expected?
Many economists and strategists believe the bill, dubbed “one big beautiful bill” by Republican leaders, contains such generous benefits that it threatens to reignite inflation. Additionally, it will hit consumers’ pockets early next year, making the path for the Fed and the economy a little rockier.
The law makes tax changes retroactive to 2025, leading some analysts to expect what JPMorgan Asset Management calls a “surge in refunds.” David Kelley, the group’s chief global strategist, wrote in late August that the IRS believes “so much money has been withheld from taxpayers that refunds will skyrocket in early 2026.”
Kelly and his team estimate that the IRS will send out an average refund of $3,278 to 104 million taxpayers, but the number of taxpayers and the average refund could be much higher.
Kelly wrote that this “should boost consumer spending in a similar way to the pandemic stimulus checks,” but because it provides more benefits to higher-income consumers, it may not be spent as quickly as the pandemic stimulus, which primarily benefited middle- and low-wage workers.
“There’s going to be more financial damage,” said David Kotok, co-founder of Sarasota, Fla.-based Cumberland Advisors, which has $3.3 billion in assets. Kotoku told USA TODAY that the combination of more money to stimulate consumption and still-accommodative monetary policy will accelerate inflation. “We are trying to push up prices by pressuring central banks to lower interest rates at the wrong time,” he said.
Traders overwhelmingly expect the Fed to cut interest rates by another 40 percentage points at its mid-December meeting, according to the CME FedWatch tool. Meanwhile, experts of all stripes, from investment managers and economists to policymakers and social scientists, continue to debate the impact on ordinary Americans of the drama coming out of Washington, including shock-and-awe policies like detentions and mass layoffs.
“Yes, I’m worried about the economy,” Kotoku said. “I don’t expect inflation to subside, reverse and fall to very low levels. I do expect an economic shock to an economy that is being shocked every day.”
American consumers continue to spend
But Ed Al Hussaini, portfolio manager at Columbia Threadneedle Investments, believes concerns about vulnerable U.S. consumers are overblown.
“The idea is that if you shake consumer confidence, they will become more conservative, save more and spend less,” Al Hussaini said. “Is there evidence of that in the overall behavior of U.S. consumers? Absolutely not. Just not.”
In fact, holiday spending leading up to Cyber Monday was 7.1% higher than a year ago, according to Adobe data.
Nevertheless, Al-Hussaini and others say it has more power than consumer spending and could outweigh the rise in inflation.
Analysts at Pantheon Macroeconomics said in a Dec. 1 note that “the sharper-than-expected decline in inflation will likely prompt the[Fed]to continue accommodative policy beyond this month’s meeting, as numerous surveys point to significantly slower wage growth and a decline in core service inflation in the coming quarters.”
What Al Hussaini is most focused on is wage growth, which has slowed since March 2022. Without that, he believes, inflation will have no traction.
“I think the simplest explanation is that there isn’t enough demand across the system,” he says. “This is a low pressure system, and it’s like a deflating balloon.”
