In addition to driving up the national budget deficit, the Republican-sponsored tax reform plan also likely will push up growth and cause the Fed to hike interest rates faster than it had planned, according to a Deutsche Bank analysis.
If the plan were to be put in according to the broad strokes the GOP outlined last week, it would add $2 trillion to $2.5 trillion to the deficit over the next 10 years, Matthew Luzzetti, senior economist at Deutsche Bank, said in a note.
Even under a more modest plan that would stand a better chance of congressional approval, that would still boost the shortfall by up to $1.7 trillion, Luzzetti said.
Correspondingly, tax cuts associated with the full plan would boost economic growth by 0.4 percentage point by the end of 2018. Under the scaled-back scenario, GDP would get a 0.2 percentage point push.
That, in turn, would force the Fed's hand, the analysis stated.
"The Fed's response is critical to these results. If instead we constrain the Fed to not react to the tax cuts, we find that growth is meaningfully higher, the unemployment rate is much lower, and core inflation would overshoot the Fed's target, potentially by a large amount," Luzzetti wrote. "These results depict very clearly why we should expect the Fed to tighten monetary policy at least modestly faster than they currently anticipate if tax cuts are passed."