One Big Beautiful Bill Ignites Growth—and Debt

Key Takeaways

• The One Big Beautiful Bill is likely to boost economic growth through a combination of tax breaks and incentives
• We expect this growth to partially offset the drag from tariffs
• The new law is projected to add $3 trillion to the federal deficit, which could push up bond yields
• The Fed remains focused on how tariffs could impact inflation expectations, with a rate cut possible in September

Fireworks weren’t the only thing bursting onto the scene this past Independence Day.

The One Big Beautiful Bill Act—a sweeping tax-and-spend package—was officially signed into law on July 4 by President Donald Trump. The legislation is likely to spark economic growth into 2026, pushing back against some of the expected drag from tariffs. The cost: persistent, large budget deficits which are likely to keep the United States on an unsustainable fiscal path. 

President Trump’s signature bill includes several important policies with major implications for the economic outlook. Most notably is a permanent extension of the 2017 tax cuts for individuals, which was table stakes for keeping the U.S. economy on its current trajectory. But the bill also builds upon the Tax Cuts and Jobs Act (TCJA) by allowing businesses to immediately deduct the cost of equipment and domestic R&D (research and development) from their taxable income. At the same time, the act also offers temporary incentives to build new manufacturing facilities in the United States.

Looking ahead, these business measures are likely to have larger effects on growth than the changes to tax laws for individuals, potentially boosting real GDP by as much as 0.4% next year. For context, this would offset roughly half of the expected 0.7% drag from tariffs. A range of sectors spanning utilities, communication services and tech—where capital expenditures and R&D are a large share of total revenue—could benefit from the new policies.

But will they? It depends on whether business leaders have the necessary visibility and confidence to invest for the long term. Hopes for a similar pickup in equipment investment in 2018 were throttled by weaker industrial demand and heightened uncertainty surrounding the U.S.-China trade war. 

Away from the estimated tailwind to growth, the new law is expected to add roughly $3 trillion to the national debt over the next decade, with the debt-to-GDP ratio likely to rise to around 130% by 2034—an all-time high. We think these risks are well known in the market but could cause the term premia—the extra yield sought by investors for uncertainty on the interest-rate outlook—to rise over the medium term. 

Stimulative fiscal policy—all else equal—is hawkish for the Federal Reserve because it boosts economic growth and pushes prices higher at a faster clip. But these effects are unlikely to be large enough to shift the central bank’s focus away from the main risk: that tariffs could trigger higher inflation and—more importantly—an unanchoring of inflation expectations.

So far, we don’t see strong evidence of inflation expectations unanchoring. Medium-term market-based inflation measures have remained stable near the Fed’s 2% target, while near-term consumer inflation expectations have retreated from their April run-up. If these trends hold, we could see rate cuts later this year, with our central scenario calling for a 0.25% cut in September. On balance, U.S. Treasuries continue to trade in a range near our estimates of fair value.

Good for growth, bad for debt—the new law is a mixed bag for investors, despite its name. Like any fireworks show, beauty is in the eye of the beholder. So whether the markets respond to the One Big Beautiful Bill with "oohs and aahs" or view it as a dud remains to be seen.