The American Jobs Plan

The stated goal of the plan is to reform corporate taxation—specifically, to increase revenue collection through a fairer tax system while reducing incentives to hide profits and offshoring.

The marquee proposal under the plan would increase the C corporation tax rate to 28% from 21%. It's important to note that several Democratic senators have expressed concerns over a 28% corporate rate and have instead suggested a rate of 25%. The Republicans generally view a modification of the Trump-era Tax Cuts and Jobs Act (TCJA) provisions as a "red line." The topic of a global minimum tax is addressed with a 15% minimum tax on the income of large international corporations with income greater than $2 billion.

From a spending perspective, the budget contains several proposals to support housing and infrastructure, including a low-income housing-tax credit and a Neighborhood Homes Investment Tax Credit, which would support investments in houses in run-down neighborhoods. Despite the absence of a carbon tax, there are also proposals to support and prioritize clean energy with tax credits for electricity transmission and electric trucks.

Interest Rates and Inflation

What We Know

The Federal Reserve (Fed) will slowly reduce purchases of Treasuries and agency mortgage-backed securities in November. An interest-rate hike is possible by the end of 2022. Although US real rates are negative, this needs to be compared to the global market in which roughly 20% of all global investment-grade (IG) bonds have a nominal negative yield. A yield around 2% for US corporate credit is outstanding when compared with what is available abroad. Despite the low-rate environment in the US, we believe yields on IG corporates are the most attractive they have been in years for non-US investors on a currency-adjusted basis. 

In addition, while forecasts are estimating that we'll see nearly $1.3 trillion in IG corporate supply in 2021 (the third highest on record), we believe much of this supply was front-loaded. Companies still carry sizable cash war chests and the mergers-and-acquisitions pipeline with issuance implications is relatively low. All these factors point to a strong technical picture for US IG corporate bonds despite low yield levels.

What to Watch

• Leadership at the central bank: Fed Chair Jerome Powell’s term expires next year and the decision to reappoint him is complicated by two factors: Sen. Elizabeth Warren’s opposition to the Fed’s deregulation during Powell’s term and an ethics scandal in which two regional Fed presidents traded for their own profit in assets that the Fed’s actions could have influenced. In addition to one governor’s term ending early next year, the scandal prompted both men to resign. We expect the White House to announce President Biden’s choice of whom to lead the Fed in the coming weeks.

• Consumer sentiment surveys: The University of Michigan survey decreased, which could imply this is a good time to make major purchases. Inflation is outpacing wages, cutting into real purchasing power and dragging on demand.
  

Our economists published a baseline scenario that sees global growth increasing to 5.9% in 2021 and inflation rising to 2.9%. We expect that some of the latest spike in the US Consumer Price Index¹ will turn out to be transitory and for prices to gradually fall in the following months. However, we expect that inflation over the next several years will run at a higher rate than it has for the last several years.

We have run scenarios on the path of inflation: while the baseline scenario is relatively benign to risk assets,² there's a risk that our inflation forecast could be wrong, and the price increases we have witnessed become a more permanent feature. To this end, we have modelled two cases that we think are relevant: a "Boom and Bust" scenario and a "Supply Side Inflation" scenario. Both have higher baseline inflation with different levels of growth.

As the economy transitions back to a new normal, we expect to face higher levels of inflation over the medium term—driven by the Fed average inflation-targeting policies and remaining supply bottlenecks for goods and labor. These factors account for much of the increase in our forecast for US inflation, which we now expect to come in at 3.8% this year and 3% next (increases of 0.5% and 0.7% respectively).

We continue to expect inflation to ease in the coming months as base effects pass through and the recovery pushes down unit-wage costs. Core inflation (excluding food and energy) is also expected to ease as the jump in prices that has accompanied re-opening fades. However, by the second half of next year, the closing of the output gap means that underlying inflation picks up again and core inflation rises more broadly.