Rating agencies expect US spending bill to reduce inflation and deficit over time

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Signage is seen outside Moody’s Corporation headquarters in Manhattan, New York, U.S., November 12, 2021. REUTERS/Andrew Kelly

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WASHINGTON, Aug 8 (Reuters) – A sweeping bill passed by the U.S. Senate on Sunday to tackle climate change, cut drug prices and raise some corporate taxes will reduce inflation in the mid- to term and will reduce the deficit, rating agencies Moody’s Investors Service and Fitch Ratings told Reuters on Monday.

The legislation, known as the Inflation Reduction Act, however, will not reduce inflation “next year or next year,” said Madhavi Bokil, senior vice president of Moody’s Investors Service.

Charles Seville, senior director of sovereign group economics at Fitch, said the legislation was disinflationary “but despite all the rebranding of the legislation, the impacts on inflation are relatively small and won’t really start to pick up. worsen only in the medium and long term as these provisions take effect.”

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“We think this act will have an impact (of reducing inflation) because it increases productivity,” Bokil said, adding that his horizon was two to three years.

The Senate passed the $430 billion bill on Sunday, a major victory for President Joe Biden, sending the measure to the House of Representatives for a vote, likely on Friday. They should adopt it and send it to the White House for Biden’s signature. Read more

Republicans, arguing the bill won’t fix inflation, have denounced it as a job-killing left-wing spending wish list that could undermine growth when the economy risks sliding into recession.

Bokil said that in the immediate short-term future, inflation was going to be fought by the Federal Reserve as it raised rates.

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

Although the legislation’s short-term impact on inflation is modest, the bill still has the potential to lower inflation expectations, said Wendy Edelberg, senior economics researcher at the think tank Washington, the Brookings Institution, to Reuters in an email on Monday.

Senate Democrats also said the bill would cut the deficit by $300 billion over the next decade, while the U.S. Congressional Budget Office said the bill would cut the federal deficit by 101. $5 billion net during this period. The CBO estimated in May that the 2022 federal budget deficit would be $1.036 trillion.

Asked about the impact of the legislation on the budget deficit, Bokil said: “Savings on the health insurance side as well as tax changes will more than offset the additional cost.”

Sevilla also said the bill would reduce deficits and help contain rising health care costs.

The legislation aims to reduce prescription drug costs by allowing Medicare, the government-run health care plan for the elderly and disabled, to negotiate prices for a limited number of drugs. Read more

Edelberg also said the bill will lead to “greater corporate tax revenue than we would otherwise see,” which will offset the cost and control the deficit.

Moody’s said the spending bill complements another bill recently passed by Congress, which aims to subsidize the U.S. semiconductor industry and bolster efforts to make the U.S. more competitive. with China.

“They’re going in the same direction, so the flea law will also help alleviate some of the supply chain issues,” Bokil added.

(This story refiles to add additional information under paragraph 3)

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Reporting by Kanishka Singh in Washington; Editing by Megan Davies and Lisa Shumaker

Our standards: The Thomson Reuters Trust Principles.

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