Tax-Cut Extension May Bolster Economy, Limit Need for Fed to Go Beyond QE2

From Bloomberg.com:

President Barack Obama’s agreement to prolong Bush-era income-tax cuts may reduce pressure on the Federal Reserve to extend its $600 billion bond-purchase program while spurring U.S. economic growth.

Obama’s deal with congressional Republicans may raise gross domestic product next year by as much as half a percentage point to about 3.1 percent, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. Tom Porcelli, a senior economist at RBC Capital Markets Corp. in New York, is raising his growth forecast for 2011 by one point, also to 3.1 percent.

The agreement goes beyond what economists were expecting by including a 2 percent cut in payroll taxes, which fund Social Security and Medicare. The proposal also sets the estate tax at a top rate of 35 percent, extends aid for the long-term unemployed by 13 months and would allow companies next year to deduct the full cost of investments in equipment.

“I think it does reduce the odds that the Fed does more purchases,” Feroli said. “You’re going to have a pretty nice increase in disposable income and that should lift consumer spending.”

Stocks rallied after the agreement was announced, sending the Standard & Poor’s 500 Index to the highest level since the financial crisis in September 2008. Gains were erased in the final hour of trading after Obama said he’ll push to overhaul the tax code in two years. Treasuries fell and copper rose to a 31-month high.