Overnight Finance: Lawmakers, Treasury look to close tax law loopholes | Trump says he backs gas tax hike | Markets rise despite higher inflation | Fannie Mae asks for $3.7B

THE BIG DEAL: Lawmakers and regulators are trying to fix some unintended consequences of the GOP tax bill enacted last month.

The Treasury Department is working on a way to prevent hedge funds from exploiting a loophole in the new way the federal government treats carried interest.

Carried interest is the profit investment managers make on the funds they oversee. Under federal tax law, it can be taxed at lower capital gains rates rather than ordinary income rates.

The new law requires investments to be held for at least three years to get the capital gains rate, instead of at least one year. But that longer holding period doesn’t apply if carried interest is held by a corporation rather than an individual.

Naturally, hedge fund managers are looking at exploiting the new provision by trying to put their carried interest into S-corporations so that they don’t have to hold the investments for three years to get the tax break.

Treasury Secretary Steven Mnuchin said during a Wednesday committee hearing that his department will issue guidance to stop that loophole.

“We will have that resolved,” Mnuchin said Wednesday at a Senate Finance Committee hearing.

That’s not the only tax law issue… Senators on that panel are also looking for a fix to a provision that allows farmers to deduct up to 20 percent of sales to cooperatives but not to other companies. Chairman Orrin Hatch said the Sens. Chuck Grassley (R-Iowa), Pat Roberts (R-Kan.) and John Thune (R-S.D.) are in working on a solution.

“The current statutory language does not maintain the previous competitive balance between cooperatives, other agricultural businesses, and the farmers who sell their crops to them, which existed prior to enactment of the tax reform bill,” Hatch said.

 

Market spike higher despite fears over rising inflation: Today was supposed to be one of those don’t-check-your-401(k) kind of days.

The Consumer Price Index (CPI) increased 0.5 percent in January, and 2.1 percent over the past twelve months, the Bureau of Labor Statistics reported Wednesday.

The index for all goods minus food and energy rose 0.3 percent, though economists had predicted a 0.2 percent increase.

The unexpected price increases, plus a decrease in retail sales, were projected to take a toll on the stock market. Traders fear that rising inflation could spur the Federal Reserve to raise interest rates at a quicker pace in 2018.

Dow futures fell more than 200 points in response to the news, while S&P and Nasdaq futures declined 30 points and 73 points, respectively. The Dow, S&P and Nasdaq also took 0.5 percent losses upon Wednesday’s open.

But the Dow finished 253 points higher (1 percent), the S&P gained 35 points (1.3 percent) and the Nasdaq finished with a 130-point gain (1.9 percent).

 

What’s going on? It’s hard to say, but it’s possible that the market is adjusting to likely, expected Fed rate increases. Fed officials have projected two, maybe three rate hikes in 2018 for months, and Chairman Jerome Powell is expected to stick close to the path laid out by his predecessor, Janet Yellen.

More volatility in the market could lie ahead as we get closer to the Fed’s March meeting and more economic data rolls in. And with this market, it’s risky to make a prediction for longer than a snack break. 

Fannie Mae needs $3.7 billion infusion of federal cash: Fannie Mae will need $3.7 billion from the government after losing $6.5 billion in the fourth quarter as a result of the new Republican tax law.

Fannie Mae, which has been under the purview of the federal government since the 2008 financial crisis, has been signaling that it would need the cash infusion for months.

The tax law enacted in December reduced the corporate tax rate and forced Fannie Mae to take on a one-time accounting charge that needs to be offset with the requested money, The Wall Street Journal reported.

 

Happy Wednesday and welcome back to Overnight Finance. I’m Sylvan Lane, and here’s your nightly guide to everything affecting your bills, bank account and bottom line.

See something I missed? Let me know at slane@digital-release.thehill.com or tweet me @SylvanLane. And if you like your newsletter, you can subscribe to it here: http://bit.ly/1NxxW2N.

 

LEADING THE DAY

President Trump is still “open” to increasing the gas tax as a means to create revenue for new infrastructure projects, according to a key GOP chairman.
House Transportation and Infrastructure Committee Chairman Bill Shuster (R-Pa.) said after attending a White House meeting about infrastructure on Wednesday that the president remains “open” to increasing the tax.
Axios reported Wednesday that the president backed a 25-cent increase during the bipartisan meeting with lawmakers, which comes after the administration unveiled an infrastructure proposal earlier this week: http://bit.ly/2ErsqvI.

Why it matters: This has long been a controversial idea to raise revenue among Republicans. While some believe it’s an effective way to raise sorely needed money for critical repairs, others say it would impose a disproportionate burden on low-income and rural Americans.

Hold on: Anti-tax advocate Grover Norquist’s take? “A gas tax is an attack on working Americans. NEVER,” he tweeted. Click here for Americans for Tax Reform’s full statement.

 

Let’s make a deal: A bipartisan group of senators on Wednesday said they have reached an immigration deal as lawmakers try to break through a gridlocked floor debate.

“It’s going to be ready today. It’s going to be ready today,” Sen. Tim Kaine (D-Va.) told reporters after a closed-door meeting.

Sen. Jeff Flake (R-Ariz.), who was also in the meeting, confirmed that they would be releasing an agreement on Wednesday, saying members were working on “tidying up the language.”

But leaving the meeting in Sen. Susan Collins’s (R-Maine) office, most members were tight-lipped about the content of their deal. The Hill’s Jordain Carney breaks it down: http://bit.ly/2ErsT0W.

 

Trump’s military parade could cost as much as $30 million, according to White House budget director Mick Mulvaney. Mulvaney told the House Budget Committee that the parade’s cost would vary depending on length, but could be anywhere from $10 million to $30 million.

Pentagon officials have reportedly raised questions about the funding for the parade, which could come around Veterans Day: http://bit.ly/2EpjkQ9.

The Financial Stability Oversight Council will meet Feb. 21 to discuss, among other topics, the designation status of non-bank systemically important financial institutions. Prudential Financial is the sole remaining non-bank SIFI, and Mnuchin said last week that FSOC would be reviewing its status soon. We’ll have more on that on The Hill tomorrow morning. 

 

GOOD TO KNOW 

• Speaker Paul Ryan (R-Wis.) would not outline leadership’s plan for an immigration bill if the conservative measure that is currently being whipped in the House can’t get enough support to pass, according to The Hill’s Melanie Zanona.
  Asked Wednesday if he would bring separate legislation to the floor if a bill crafted by Senate Judiciary Committee Chairman Bob Goodlatte (R-Va.) lacks support, Ryan said: “We’re not going to do ifs, ands or buts.”
  “At the end of the day, we want to have a solution,” he said at a press briefing: http://bit.ly/2Erud4b. 

• Experts fear US losing ground to China on AI, according to The Hill’s Ali Breland. China’s public intention to become the world leader in the development of artificial intelligence has many in the United States questioning what the U.S. government is doing to protect the country’s dominant position in the AI race: http://bit.ly/2EpCKog.

• There was bipartisan praise on Wednesday for a bank that’s often a favorite target of lawmakers, The Hill’s Kaitlin Milliken reports.
  Goldman Sachs’s 10,000 Small Businesses initiative, which provides education and financing to entrepreneurs, was the focus at a hearing of the House Small Business Committee.
  Lawmakers heard from small business owners who participated in the program, which helped prepare them for the capital and compliance issues they faced launching their businesses.
  Steven Strongin, head of Goldman Sachs’ Global Investment Research Division, also testified before the committee, highlighting the difficulties for new ventures in securing capital. Having a poor personal financial history or little in assets can often be a barrier for budding entrepreneurs. Those limits often mean small owners have nowhere to turn for help.
  “You need different types of financing at different moments in a firm’s lifetime. The startup tends to be very mortgage, credit card, personal assets intensive,” Strongin said.
  Strongin also pushed for putting small businesses regulations into one database, making it easier for small owners to make sure they complied with rules. 

• Five things you may have missed in Trump’s infrastructure plan, from The Hill’s Mallory Shelbourne: http://bit.ly/2EpDiKQ.