In the year that comes from typing, it’s the tax version that will really bite.

The gossip in the US financial markets concerns the further reduction to be announced by the Federal Reserve in its bond purchases. This masks something important: the reduction already underway in federal budget support – which is expected to have a much bigger impact on economic growth next year.

U.S. expansion is expected to slow sharply in the second half of 2022 as the measures that have supported the economy during the pandemic – including stimulus checks for households and no-cost financing for small businesses – disappear from the market. seen.

This will be the case even if President Biden succeeds in securing congressional approval for the bulk of his $ 3.5 trillion “Build Back Better” program. The spending will stretch for years, with limited impact in 2022. It will also be at least partially funded by tax increases that slow the economy rather than speed it up.

“Moves sideways”

“We expect very low growth rates” at the end of 2022 and into 2023, said Wendy Edelberg, director of the Hamilton project at the Brookings Institution. “It wouldn’t surprise me if there is a quarter here or where the economy is essentially moving sideways. “

She is not the only one predicting a sharp slowdown. Jan Hatzius, chief economist at Goldman Sachs Group Inc., expects the United States to grow at a rate of 1.5% by the end of next year, up from 5.7% in 2021.

The coming deceleration would be bad news for investors, who have pushed stock prices to record highs.

It could also cause problems for Biden and his fellow Democrats in Congress, as they seek to retain a slim majority in the November 2022 midterm election – especially if this is accompanied by rising unemployment, though most economists don’t expect it.

There is a potential benefit: lower inflation. Prices have jumped this year amid booming supply chains and tax-fueled consumer demand. “We will have to come out of the boil,” Edelberg said, as the rapid rebound in the United States will push the labor market and the economy to their limits by the middle of next year.

‘Very exaggerated’

Fed Chairman Jerome H. Powell and his colleagues are expected to discuss the cutback plans at this week’s policy meeting. Powell said they could start cutting bond purchases this year. The central bank will continue to stimulate the economy and financial markets until the end of the purchase program, possibly sometime in 2022.

This is not the case with fiscal policy, which has already started to act as a drag. The Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy calculates that the economic impact of federal, state, and local taxes and spending turned negative in the second quarter and will remain so until 2023.

And even if Biden gets all the extra spending he’s looking for, the contraction in the federal government’s budget balance over the coming year will still be one of the biggest on record, according to White House figures.

There are mitigating factors.

American households increased their savings during the pandemic by some $ 2 trillion or more. This “cushions any alleged tax burden that might appear to be on the books,” said former Congressional Budget Office director Douglas Holtz-Eakin, who is now president of the American Action Forum. He is skeptical that budget fluctuations will significantly slow the economy, calling the idea “extremely overestimated.”

State and local governments have also been slow to spend some of the aid they received from Washington, leaving them with firepower for the future.

“Run for the door”

But none of this is likely to fully offset the shrinking impact of weaker budget support.

“The tailwind of fiscal policy is now starting to turn into a headwind that will blow very hard by the spring of next year,” said Mark Zandi, chief economist at Moody’s Analytics. “Without any additional budget support, the economy will feel a bit fragile around election day 2022.”

Investors, for their part, are starting to worry about a slowdown ahead. They became significantly less optimistic about the economic outlook in Bank of America’s latest global survey of fund managers, titled “Tax Frenzy Turns into Tax Flop.”

At the same time, they have remained all-in on stocks. This disconnect makes stock prices vulnerable, said David Jones, director of global investment strategy for BofA Securities.

“The longer this dissonance between fundamentals and positioning lasts, the more it raises the specter of a violent and messy market event in which everyone is running for the door,” he said.