US budget deal to support inflation fight, rating agencies say

A sweeping bill passed by the US Senate on Sunday that aims to tackle climate change, lower drug prices and raise some corporate taxes will lower inflation and narrow the deficit in the medium to long term, rating agencies Moody’s and Fitch Ratings said.

However, the law, known as the Inflation Reduction Act, will not bring down inflation “for the next year or so,” said Madhavi Bokil, senior vice president at Moody’s Investors Service.

Charles Seville, senior director and co-head Americas Sovereigns at Fitch, said the legislation is disinflationary, “but despite all the renaming of the legislation, the impact on inflation is relatively small and will only really amplify in the medium and long term once these provisions are in place come into force”.

“We believe this law will have an impact (by lowering inflation) as it increases productivity,” Ms Bokil said, adding that her horizon was two to three years.

The Senate passed the $430 billion bill on Sunday, a huge victory for President Joe Biden, and is likely to send the measure to the House of Representatives for a vote on Friday. They are expected to hand it over and send it to the White House for Mr. Biden to sign.

Republicans, who argue the bill won’t tackle inflation, have denounced it as a job-killing, left-wing spending bucket list that could undermine growth if the economy threatens to slide into recession.

Ms Bokil said inflation would be tackled in the near future by the Federal Reserve raising interest rates.

Inflation expectations are a key dynamic being closely watched by Fed policymakers as they aggressively raise interest rates to contain price pressures, which are at four-decade highs.

While the legislation’s near-term impact on inflation will be modest, the bill still has the potential to lower inflation expectations, according to Wendy Edelberg, senior fellow in economic studies at Washington-based think tank Brookings Institution .

Senate Democrats also said the law would result in a $300 billion deficit reduction over the next decade.

The CBO estimated in May that the federal budget deficit in 2022 would be $1.036 trillion.

When asked how the legislation would affect the budget deficit, Ms. Bokil said, “The savings from Medicare, as well as the tax changes, will more than offset the additional costs.”

Mr. Sevilla also said the bill will reduce deficits and help curb rising healthcare costs.

The law aims to lower the cost of prescription drugs by allowing Medicare, the state’s health care plan for the elderly and disabled, to negotiate the prices of a limited number of drugs.

Ms Edelberg also said the bill will result in “higher corporate tax revenues” that would offset costs and control the deficit. US budget deal to support inflation fight, rating agencies say

Fry Electronics Team

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