Tax Bill Won't Right the Fiscal Ship: Ernie Tadeschi

Ernie Tedeschi, Director of Economics at the Yale Budget Lab, discusses his recent findings on the impact of tariffs on US companies and the US economy.

Treasury yields declined to the lowest levels in nearly a month for most tenors after weaker-than-expected gauges of job creation and service-sector activity strengthened traders’ conviction that the Federal Reserve will resume cutting interest rates this year.

Two- to 10-year yields reached the lowest levels since May 9 after the ISM Services gauge for last month declined unexpectedly, signaling contraction in the sector for the first time since last June. The bond market added to earlier gains unleashed by ADP Research data showing that private-sector job growth was the weakest in two years. The US government’s broader employment data for May, to be released Friday, is expected to show deceleration also.

The ADP data drew a swift response from US President Donald Trump, stating in a social media post that the Fed needs to cut interest rates, a demand he’s made repeatedly.

“This is a leading indicator into what we think is going to happen in Friday payrolls,” Jim Caron, a chief investment officer at Morgan Stanley Investment Management, said on Bloomberg Television. “It does make the Fed probably have to step up and look. The thing they are worried about the most is a softening in the jobs market.”

Treasury yields across the maturity spectrum declined by six to nine basis points, the benchmark 10-year note’s to 4.37%.

Traders of swap contracts that predict Fed rate changes priced in higher odds of two quarter-point cuts by year-end, in October and December. The possibility of a move in September increased to around 90%.

Donald Trump publicly resisted Medicaid cuts — until his budget director, Russell Vought, convinced the president that reductions to heath coverage for low-income people, embedded in the Republican tax bill, were just weeding out fraud and abuse.

Trump has readily adopted that rhetoric, repeatedly declaring that his signature bill contains “no cuts” to the social safety program, even as the non-partisan Congressional Budget Office estimates at least 7.6 million people would become uninsured if the bill takes effect.

Republicans are betting they can win the semantic — and thus the political — battle over the future of Medicaid. At stake is a multi-trillion dollar tax bill, the cornerstone of Trump’s economic agenda, which Republicans are relying on to counter the effects of tariffs that threaten to slow down economic growth.

The Medicaid cuts of about $723 billion represent a major bill payer for GOP priorities, a significant negotiating point for fiscal hawks and a key way Republicans are paying for major tax cuts. But at least five senators have expressed reservations about the way the cuts could hit rural hospitals or working-class people. Trump can’t lose more than three Republican senators and pass the measure.

One former Trump official said the plan is to message Medicaid robustly this week, starting with the definition of “cut.”

“Republicans just need to explain the policies they are pursuing. I don’t think it will hurt them in the midterms,” said Brian Blase, president of the Paragon Health Institute who worked at the National Economic Council during the first Trump term.

Yet Democrats view the cuts quite differently and see them as a welcome talking point in a year in which they’ve struggled to attack the president’s agenda. Causing millions of Americans to lose health insurance while cutting taxes for businesses and wealthy people seems like an easy way to paint Republicans as out of touch.

Rahm Emanuel, a former Democratic House lawmaker, former mayor of Chicago and former White House chief of staff who is considering running for president in 2028, said he’d contrast the boosts for billionaires like Elon Musk, Jeff Bezos and Tim Cook against children whose coverage could be at risk.

The Congressional Budget Office is slated to put out a more detailed analysis of the House bill on Wednesday.

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