Joel Prakken

President Trump has asked Congress to suspend federal fuels taxes temporarily in order to lower prices paid by drivers at the pump. Unfortunately, doing so probably won't produce the desired result, but energy companies certainly won't object.  Here’s why.

**A complete version** of this commentary is available [here](https://static.haver.com/Haver_Commentgary_Suspending_the_Fuels_Tax_051126_77972166ea.pdf).

Suspending the Fuels Tax: Be Careful What You Wish For

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Paul L. Kasriel

Grinnin’ Kevin Hassett, a White House economic adviser, said on Fox Business on May 6, 2026: “Credit card spending is through the roof. They’re [households] spending more on gasoline, but they’re spending more on everything else, too.” Hassett went on to say that the spending surge was due to households having “so much more money in their pockets”. Well, if households are running up their credit card balances, yes, they temporarily have “more money in their pockets”. Although Hassett thinks that this is a good thing, I see it as a reason why the increase in energy prices will seep into the prices of non-energy goods and services.

Let’s look at some data that are consistent with Hassett’s credit-card spending hypothesis. Plotted in the chart below are the observations of the eight-week annualized percent changes in commercial bank credit card and other revolving loans. In the eight weeks ended April 29, these loans grew at an annualized pace of 12.7%. So, this is consistent with Hassett’s happy hypothesis about households running up their credit card balances.

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But Hassett might not be grinnin’ so much if the higher energy prices start to be associated with higher prices for other goods and services. Why might this occur with the increase in household credit card borrowing? If households did not increase their credit card borrowing, all else the same, they would have to cut back on their nominal purchases of non-energy goods and services as they spend more of their nominal income on higher-priced energy goods and services. Sellers of non-energy goods and services would try to pass on their higher costs of production due to higher energy prices. But again, if households did not increase their credit card borrowing, they would have less nominal income left over to purchase non-energy goods and services. With a decline in the demand for non-energy goods and services, sellers of these would have difficulty passing on their higher energy costs of production. This would keep the prices of non-energy goods and services from rising.

But, if households maintain their nominal purchases of non-energy goods and services along with their higher nominal purchases of increased-price energy goods and services by running up the credit card balances, then the prices of non-energy goods and services need not remain the same. These prices would go up as sellers of these non-energy goods and services are able to pass on their higher energy costs of production. In sum, by households increasing their nominal spending in the face of higher energy prices by running up their credit card balances, not only will energy prices go up, but so, too, will the prices on non-energy goods and services.

Why do I say in the title of this commentary that Kevin Hassett is right for once? In September 1999, Hassett and his co-author, James Glassman, published a book entitled Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market. The authors believed that the US equity market was significantly undervalued and would rise in value dramatically. At the end of September 1999, the Dow Jones 30 Industrial Stock Index closed at 10,337. In September 2009, the Dow closed at 9,712. The Dow did not hit 36,000 until December 2021. Hassett and Glassman followed the forecasting rule that if you forecast a number, don’t give a date associated with the forecast number. So, to be fair, to Hassett, he was not wrong. The Dow eventually did hit 36,000. All right, turn about is fair play. Hassett can remind me of one of my errant forecasts.

Kevin Hassett Is Right, For Once?

Charles Steindel

Movements in the Federal Reserve Bank of Philadelphia’s state coincident indexes in March were generally muted.  In the one-month changes, West Virginia led with a 1.12 percent gain,  with North Dakota the only other state with an increase above  .5 percent. Five states were down, but  Hawaii’s .62 percent drop was the only one larger than .10 percent.  Over the three months ending in March, while nine states were down, Hawaii was again the only one with a drop of as much as .5 percent. North Dakota, Indiana, and New Jersey were the only states seeing gains of 1 percent or more.   Over the last twelve months, four states were down—West Virginia, which has clearly been quite volatile recently, was off 3.42 percent, but no other fell as much as half that. No state had an increase higher than four percent, and only three were higher than three percent.

The independently estimated national estimates of growth over the last three and twelve months were, respectively, .50 and 1.76 percent. Both measures appear to be fairly consistent with the state numbers.

State Coincident Indexes in March 2026

Sharmila Whelan

India’s economic performance in 2025 exceeded expectations across the board. During our recent visit to Mumbai, nearly all contacts expressed surprise at the economy’s resilience. Despite the disruption from Trump’s tariff measures—under which Indian exports faced duties of up to 50% until an interim agreement was reached in February 2026—India still expanded by 7.6% in 2025, an improvement on 7.1% in 2024.

Growth did soften marginally in the final quarter, easing to 7.8% YoY from 8.3% YoY, largely due to weaker net exports. However, the more important takeaway for a domestically driven economy is that private demand strengthened (Figure 1). Consumption-led growth remained robust, and while export growth slowed, import volumes—a leading indicator of domestic demand—picked up significantly.

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Source: Have Analytics & Westbourne Research

India also made notable progress on inflation. Headline consumer price inflation fell sharply from above 5% year-on-year in December 2024 to just 1.1% by December 2025. This paved the way for the Reserve Bank of India to cut policy rates by 125 bps.

Corporate performance has been equally encouraging (Chart 1, Figure 2). Strong domestic demand has driven profitability higher, with average return on equity (RoE) for listed companies rising to 15.2%, well above the pre-pandemic average of around 12%. This suggests that the corporate profit cycle remains firmly in an upswing.

Public finances have also improved (Chart 2, Figure 2). The fiscal deficit narrowed for the third consecutive year, falling to 4.5% of GDP, while public debt has stabilised at around 56% of GDP, supported by strong nominal growth. Together, these factors paint a picture of an economy with solid macroeconomic fundamentals.

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Source: Bloomberg, Haver Analytics & Westbourne Research

**Precariously Balanced**

Yet beneath this strong performance lies a more fragile reality.

India’s growth model is becoming increasingly imbalanced. A sustained rebound in private investment remains elusive, and the country risks falling behind in emerging sectors such as artificial intelligence and next-generation manufacturing.

Traditional capital-intensive industries remain cautious following the boom-and-bust cycle of the mid-2000s. Many firms are still reluctant to commit to large-scale domestic investment and are increasingly looking overseas for expansion. Structural headwinds—including Chinese overcapacity, intense global competition, and regulatory uncertainty—continue to weigh on sectors such as steel, petrochemicals, and engineering procurement and construction (EPC).

At the same time, smaller firms are being squeezed as large conglomerates—such as Reliance, Tata, and Adani—expand aggressively into consumer-facing sectors. While corporate credit growth has picked up, it is largely being used for working capital rather than new capital expenditure.

The government’s flagship Production Linked Incentive (PLI) scheme has delivered mixed results. While it has succeeded in attracting investment in select sectors, its broader impact on private investment has been limited. Where investment is taking place—particularly in semiconductors, renewables, and data centres—it is not yet sufficient to offset weakness in traditional industries.

As a result, public investment continues to do the heavy lifting. Infrastructure spending has risen sharply since the pandemic and is set to reach a record US$133 bn (around 3.7% of GDP) in FY27, covering sectors such as transport, energy, and urban infrastructure.

However, public investment alone cannot fully compensate for weak private sector participation. The share of private corporate investment in total national fixed investment has declined, while the share of government spending has increased. This has deepened the investment cycle downswing (Figure 3).

260507SW3.jpg

Source: Haver Analytics & Westbourne Research

Concerns around governance and execution further complicate the outlook. Public-private partnership (PPP) models remain unattractive due to issues around risk allocation, delays, and uncertain returns. Some market participants also point to growing centralisation of decision-making, with project allocation increasingly influenced by the central government—reinforcing the dominance of large corporate groups.

**China Factor and Industrial Strategy**

China continues to exert a dual influence on India’s industrial landscape. On one hand, Chinese overcapacity discourages domestic investment in globally exposed sectors. On the other, India remains dependent on Chinese imports and expertise in areas such as EPC execution and low-cost components.

Looking ahead, Prime Minister Narendra Modi has set an ambitious target to raise manufacturing’s share of GDP from around 16–17% to 25% over the next decade. This vision is supported by the PLI scheme and a series of trade agreements aimed at integrating India into global supply chains.

There are some early successes. Emerging sectors—including electronics, electric vehicles, solar photovoltaics, and defence—are seeing stronger investment momentum. The electronics PLI scheme, in particular, has been effective. India now assembles all iPhone 17 models, accounting for roughly 25% of global iPhone production. However, this remains the exception rather than the rule.

**Consumption: Strong but Questionable**

With investment weak, consumption remains the primary driver of growth. Household spending ended 2025 on a strong note, growing by 8.4% YoY.

Rural households have been central to this momentum. Real rural incomes have outpaced urban incomes, supported by a shift toward non-agricultural activities. Non-farm income now accounts for over 50% of rural earnings and is growing faster than agricultural income.

By contrast, urban income growth has been constrained by job losses in manufacturing and IT, as well as slower wage growth in services. The rise of the gig economy—across e-commerce, food delivery, and transport—has not fully offset these pressures. Moreover, the share of regular salaried employment has declined to around 25%, dampening consumption stability.

Rural consumption is now growing as fast as, or faster than, urban consumption across income groups (Figure 4). However, this strength is partly underpinned by fiscal support, raising questions about sustainability.

260507SW4.jpg

Government transfers have expanded significantly. The number of states providing unconditional cash transfers has risen from 11 to 16 in recent years. Transfers to women and farmers have increased by over 36% since FY19, reaching approximately ₹2.6 trn (~0.7% of GDP). Additional support through food programmes and agricultural schemes further reinforces consumption.

Tax policy has also played a role. The September 2025 GST rationalisation reduced rates on mass consumption goods, including automobiles and consumer durables. While this has supported spending, its impact is likely to diminish over time.

In sum, India’s economy appears finely balanced. Growth is expected to moderate to around 7% in FY27, down from 7.6% in FY26, as the effects of fiscal support fade and investment remains subdued. Inflation dynamics and external risks may also limit further monetary easing, with the Reserve Bank of India likely to remain on hold or potentially tighten if conditions warrant.

**Investment Implications**

Against this backdrop, we are shifting our stance on Indian equities from overweight to neutral.

While macro fundamentals remain solid, the lack of investment momentum and questions around consumption sustainability warrant caution. That said, structural shifts—particularly in rural incomes and consumption patterns—create selective opportunities.

We favour sectors leveraged to domestic demand, structural change and public infrastructure spending, including:
•	Fast-moving consumer goods (FMCG) 
•	E-commerce 
•	Healthcare 
•	Airlines 
•	Cement

India

India: Strong Growth, Fragile Balance

The Congressional Budget Office (CBO) projects large federal budget deficits, in absolute as well as relative terms, as far as the eye can see. This, by definition, means continued increases in the federal debt, again in both absolute and relative terms. The CBO forecasts that the levels of interest rates across the maturity spectrum over the next 10 years will be approximately where they are currently. My “forecast” is that the levels of interest rates, especially in the longer maturities will be higher than the CBO’s forecast. Be that as it may, the CBO projects that net interest on the federal debt will rise inexorably over the next 10 years. Given that Social Security, Medicare, Medicaid and defense expenditures are projected to dominate federal outlays excluding interest on the debt, there is little room for the federal government to slow the growth in federal spending without precipitating a walker-aided march on Washington, DC. By the way, it is projected by the Social Security Administration that its “trust” fund for old-age benefits will be exhausted by 2036. This means that all else the same, benefit payments to then current recipients will have to be cut. Do you really think “all else will be the same”? I think there will be a change in the law allowing the Treasury to borrow more to allow Social Security to maintain its “promised” benefits. Increasing taxes in a meaningful way appears to be politically unfeasible. Under these circumstances, **I believe that the federal government, with “cooperation” from the Federal Reserve will attempt to inflate away its federal debt/debt-servicing challenges. It will do this by the Treasury purposely shortening the maturity structure of the federal debt and inducing the Federal Reserve, which dominates the level of short-maturity interest rates, to maintain the federal funds rate at a below-equilibrium level. This will result in a steepening in the yield curve, with the level of longer-maturity interest rates increasing relative to the federal funds rate as well in absolute terms. This will be accompanied by faster growth in the credit created by the Federal Reserve and the depository institution system, i.e., credit created, figuratively, out of thin-air (drink). In turn, this faster growth in “thin-air” credit will result in higher inflation.**

Plotted in Chart 1 are fiscal-year observations of federal budget deficits (-)/surpluses (+) in absolute terms (blue line) and relative to nominal GDP (red bars). Historical data run from FY 1965 through FY 2025 and CBO projections are from FY 2026 through FY 2036. By FY 2036, the CBO projects that the federal budget deficit will be $3.1 trillion, compared with $1.8 trillion in FY 2025. As a percent of GDP, CBO projects the budget deficit in FY 2036 to be -6.7% compared with a median of -3.0% for fiscal years 1965 through 2025.

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As shown in Chart 2, the CBO projects that the overall federal budget deficit will widen by about $1.3 trillion from FY 2025 to FY 2036 (the blue bar). But the deficit excluding interest payments on the federal deficit, known as the primary deficit, is projected to increase by about only $0.2 trillion in this same period. **Thus, we can deduce that principal driver of widening federal budget deficits in the coming years is interest on the debt.**

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Subsequent to February 11, 2026, when the CBO issued its baseline projections the Supreme Court ruled that some of the tariffs that had been imposed by the Trump administration were unconstitutional. Thus, all else the same, projected federal revenues would be smaller than what was assumed in the CBO’s baseline projections. And thus, all else the same, the projected deficits would be larger. Moreover, the CBO’s baseline projections of revenues assume that some of the current tax breaks will expire during the projection period. Perhaps. But if these tax breaks are maintained, the CBO’s baseline projection of revenues will turn out to be too high. Also, when the CBO made its baseline-budget projections, military operations had not occurred in the Persian-Gulf area. The CBO projected that defense outlays in FY 2026 would be $904.4 billion, down from actual $953.8 billion in FY 2025. The Pentagon has requested a $1.5 trillion budget for FY 2027. This compares with the CBO’s baseline projection of $920.7 billion for defense outlays in FY 2027. Given the increased cost of US military operations so far in FY 2026 and the likely higher-than-projected defense expenditures in FY 2027 to replace spent weapons, the CBO’s February 2026 baseline projections of defense expenditures would appear to be too low. All else the same, then, the CBO’s baseline projections of deficits also would appear to be too low due to higher-than-projected defense expenditures.

Plotted in Chart 3 are the fiscal year federal interest outlays as a percent of nominal GDP. From FY 1956 through FY 2025, the median value of federal interest expense as a percent of nominal GDP was 1.7%.  In FY 2025, the value was 3.2%. The CBO projects that federal interest outlays as a percent of nominal GDP will reach 4.6% in FY 2036.

260506PK3.jpg

Plotted in Chart 4 are the fiscal year observations of federal net interest outlays as a percent of total federal outlays. The median value of this from FY 1965 through FY 2025 was 8.4%. In FY 2025, this value was 13.8%. The CBO projects that federal net interest outlays as a percent of total federal outlays will climb to 18.8% in FY 2036.

260506PK4.jpg

Plotted in Chart 5 are the fiscal year observations of federal net interest outlays as a percent of total federal revenues. The median value of net federal interest outlays as a percent of total federal revenues from FY 1965 through FY 2025 was 9.8%. The value in FY 2025 was 18.6%. The CBO projects that this value will climb to 25.8% in FY 2036. So, by FY 2036, the CBO reckons that one-quarter of total federal revenues will be “dedicated” to paying the interest on the federal debt.

260506PK5.jpg

Among other things, the CBO’s baseline projection of federal net interest outlays depends on its projection of interest rates. Plotted in Chart 6 are the CBO’s fiscal-year projections of the interest rates on the 3-month Treasury bills and the 10-year Treasury security for FY 2026 through FY 2036. The average projected interest rate on the 10-year Treasury security over this period is 4.32%; for the 3-month Treasury bill, 3.19%. For some perspective, on Friday, May 1, 2026, the Treasury constant-maturity 10-year security ended the day at a yield of 4.39%; the 3-month constant maturity security at a yield of 3.68% (Source: Federal Reserve H.15 report). So, the CBO is projecting that for-close-enough-for-government work that over the next 11 fiscal years the average yield on the 10-year Treasury security will be little changed from its May 1, 2026 level and the average yield on a 3-month Treasury security will fall from its May 1, 2026 level by almost 50 basis points.

260506PK6.jpg

If interest rates should turn out to be higher, all else the same, the Treasury’s net interest outlays would turn out to be even higher than what the CBO is projecting. If there were only some way to guarantee that net interest outlays do not explode even if the amount of Treasury debt does. It turns out there is a way. It goes by the name of “fiscal dominance”. In essence, the central bank (in the US, the Federal Reserve) becomes subservient to the fiscal authority (the US Treasury). That is, the central bank’s primary responsibility is to use its monetary-policy tools, not to keep inflation in check, but rather to contribute to the orderly debt financing of the central government.

How might fiscal dominance be implemented in the US? Because the Federal Reserve has a monopoly on the creation/destruction of reserves held by depository institutions, the interest rate over which the Fed has the most control is the federal funds rate – the rate at which reserves are traded among depository institutions. If the fed funds rate is trading above the level desired by the Fed, the Fed can create more reserves in order to bring the fed funds rate back down to the Fed’s desired level. Conversely, if the fed funds rate is trading below the level desired by the Fed, the Fed can drain reserves in order to bring the fed funds rate back up to the Fed’s desired level. The federal funds rate has a maturity of one day. Shorter-maturity interest rates on Treasury securities are most influenced by the level of the federal funds rate. As shown in Chart 7, the correlation between the level of the 3-month Treasury bill rate and the level of the fed funds rate was 0.99 using annual average data from 1954 through 2025. Recall that a correlation coefficient of 1.00 means that two series are perfectly correlated. As shown in Chart 8, the correlation coefficient declines to 0.90 when the fed funds rate is compared to the yield on a 20-year Treasury security. A correlation coefficient of 0.90 is nothing to sneeze at, but the point is that the level of the fed funds rate is most closely associated with the level of the 3-month Treasury bill rate.

260506PK7.jpg

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All right, what does this have to with fiscal dominance? If the Treasury can reduce the maturity of its outstanding debt and the Federal Reserve can be induced to maintain a low fed funds rate, then the debt-servicing costs of the Treasury can be mitigated. As shown in Chart 9, the average maturity of the outstanding marketable Treasury debt in 2026:Q1 was 70 months (5.8 years). This compares with the median average maturity of 65 months (5.4 years) for the period Q4:1980 through Q1:2026. Treasury Secretary Bessent aims to reduce the average maturity of Treasury debt. The Treasury started engaging in buybacks of longer-maturity Treasury debt in 2024 and has continued to do so in larger quantities through 2026:Q1 (see Chart 10), funding these buybacks with shorter-maturity debt.

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Treasury Secretary Yellen in the Biden administration was criticized for favoring issuance of short-maturity Treasury bills over longer-maturity Treasury notes and bonds. Soon-to-be Treasury Secretary Bessent was among these critics, claiming that issuing relatively more Treasury bills versus Treasury notes and bonds was a deliberate attempt to hold down the level of longer-term interest rates. Secretary Yellen was accused of “gaming” the fixed-income market. And indeed, as shown in Chart 11, starting in late 2022, Treasury bill issuance as a percent of total quarterly Treasury securities issuance did move up. **Now that he is the Secretary of the Treasury, Scott Bessent has maintained the Yellen debt-management policy of Treasury bills “mostly”.** Moreover, Secretary Bessent has championed the issuance of Stablecoin in order to increase the demand for Treasury bills.

260506PK11.jpg

As an aside, Stablecoin is a type of crypto currency that “promises” to pay back the holder at par on demand. The issuers of Stablecoin take in purchasers’ dollars and buy Treasury bills, among other types of investments, collecting the interest. It still is not clear to me why someone would purchase Stablecoin, forgoing the interest, when they could purchase shares in a government-only money market funds and collect the interest. Is the Stablecoin “guarantee” of redemption on demand at par any better than that of a government-only money market fund? The one advantage I do see in investing in Stablecoin over a government-only money fund is that illegal transactions are easier to mask with Stablecoin.

But I digress. I would suspect that a person as well-versed in financial theory as Secretary Bessent is aware that the preponderance of research indicates that the shape of the yield curve, that is, the relationship between the levels longer-maturity interest rates and the levels of shorter-maturity interest rates is not a function of the relative supplies of the maturities, but rather of market expectations of the future levels of short-maturity interest rates. So, although hedge-fund manager Bessent accused then Secretary Yellen of trying to hold down the levels of longer-maturity interest rates by issuing relatively more Treasury bills, I do not believe that this is the motive for now Treasury Secretary Bessent’s attempt to shorten the maturity of the public debt. Rather, **I suspect his motive is to mitigate future debt-servicing costs by inducing the Federal Reserve to hold down the level of the federal funds rate.**

If the Federal Reserve maintains too low a federal funds rate, goods/price inflation is bound to increase. So, with mounting federal debt, the Treasury can avoid formal default on its debt but rather, default by another name – inflation. If the maturity structure of the debt is sufficiently shortened and the Federal Reserve can be induced to hold down the level of the fed funds rate, debt-servicing costs can be mitigated and the real value of the debt can be reduced via higher inflation.  Yes, The Mandibles, by Lionel Shriver is fiction. But is it also prescient?

Suspending the Fuels Tax: Be Careful What You Wish For

Joel Prakken

More Viewpoints

Kevin Hassett Is Right, For Once?

State Coincident Indexes in March 2026

India: Strong Growth, Fragile Balance

Inflation – Debt Default by Another Name