US economy can ‘definitely’ withstand tax hikes, BlackRock’s Rick Rieder says

As business leaders warn about the risks of a corporate tax hike, the world’s largest asset manager is decidedly unfazed. The resurgent US economy can handle it, BlackRock executive Rick Rieder told CNN Business.

The White House is laying the groundwork for lifting the corporate tax rate above its current level of 21% to help pay for an ambitious infrastructure package. The business community is warning that a business tax hike, the first since 1993, would threaten the recovery from the pandemic.

But Rieder, BlackRock’s chief investment officer of global fixed income, doesn’t think rolling back the Trump tax cuts will be debilitating to the economy — it could actually be positive for growth.

“I think 21% is too low,” Rieder said in the interview. He pointed to how many companies used their tax savings to buy back stock as evidence that the benefit to business is “too high.”

During the 2020 campaign, Joe Biden proposed raising the corporate tax rate to 28%, which is still below the pre-Trump level of 35%. Earlier this week, White House press secretary Jen Psaki said the President believes that “those at the top are not doing their part” and “obviously that corporations could be paying higher taxes.”

Rieder said the US economy can “definitely” withstand higher corporate taxes, and suggested that raising the corporate rate could help make sure economic gains are distributed more evenly between corporations and workers.

“The US economy is amazingly resilient,” he said, “and in fact will perform well when you get some of this income redistribution and consumption at an easier and a better place, particularly for lower and middle income.”

Paying down a mountain of debt

Last week, the Business Roundtable, a powerful alliance of CEOs, warned that raising the corporate tax rate would make US businesses uncompetitive on the world stage just as the recovery gathers momentum.

“The Roundtable will be actively opposing efforts to raise corporate taxes,” Josh Bolten, the group’s CEO, said during a press briefing.

But BlackRock’s Rieder suggested those concerns are overblown and don’t account for the benefit of additional tax revenue after Washington piled on trillions in debt to fight the pandemic.

Rieder said raising the corporate rate modestly “doesn’t really hurt cashflows” for companies and “allows us to maintain a lower debt profile for the overall country.”

Fed could start tapering very soon

Economists have been upgrading their US GDP forecasts since Congress passed Biden’s $1.9 trillion stimulus package. Rieder shares that optimism, predicting the US economy will grow at an average pace of 7% this year — a pace unseen since 1984.

“I think it’s going to surprise people to the upside,” Rieder said. “You’re going to see some pretty boomy growth for the economy.”

He added that “it’s been a really long time” since he felt this optimistic about the US economy.

Forecasts for an economic boom are putting pressure on the Federal Reserve to begin to unwind its emergency stance — before it overheats the economy. Not only are interest rates at zero, but the Fed is still buying $120 billion of bonds every month.

Rieder thinks the Fed will begin reducing the size of its asset purchases around September. That news could come as soon as Wednesday.

“I think they should start tapering the programs soon,” he said.

Rieder added that he expects the Fed to start lifting rock-bottom interest rates next year. That is well ahead of the Fed’s most recent guidance. In December, long before the Biden stimulus plan and accelerated rollout of vaccines, most Fed officials signaled the central bank wouldn’t bump up rates until 2024.

Liftoff plans from the Fed may spook investors who have become accustomed to extremely low interest rates. But Rieder brushed aside those concerns.

“It will not hurt the economy. In fact, in many ways it helps consumers and helps savers” being hurt by low interest rates on money sitting in the bank, he said.

Runaway inflation? Not so fast

Signaling an end to its crisis-era policies will also help the Fed keep inflation in check.

“As a central bank, you don’t want to be fighting from behind to try to rein in inflation. It’s so much more effective to be out in front and lay out the plan.”

Inflation is now the No. 1 fear among portfolio managers surveyed by Bank of America. It’s the first time since February 2020 that Covid is not the most commonly cited risk in the survey.

The big worry is that runaway inflation like that of the 1970s will force the Fed to rapidly raise interest rates, snuffing out the economic recovery.

While Rieder sees inflation accelerating, perhaps to 2.5% year-over-year, he is not worried about “explosive” price gains.

“I don’t think inflation is going to run away at all,” he said. “In fact, I think the cultural differences around inflation versus the ’70s and ’80s are immense.”

In particular, he pointed to the role of technology, in which everything from Amazon and Uber to cloud computing is keeping a lid on prices.

“The way people spend, how they shop and find prices at better levels,” Rieder said. “Plus, we don’t run a manufacturing, commodity-oriented economy anymore.”