On Thursday Congress gave final approval to a one week Continuing Resolution (CR) funding the government until midnight on Friday, December 23. Passage of the one week CR gives the Congress five days this week to approve a budget for the remainder of the current fiscal year that began on October 1.
Some Republicans are pushing for a short term CR that will run into 2023 when the House will shift control and the Senate and White House will have to deal with the Republican controlled House.
While nearly all House Republicans voted against the short term CR in the Senate the vote was bipartisan – 70 to 19. All 19 NO votes were cast by Republicans who wanted to support their House colleagues and only extend funding until March of next year in order to give the new House Republican majority more of a role in the process. However, a bipartisan Senate majority wants to make sure that increased funding for both the Department of Defense and veterans’ healthcare is approved as soon as possible and not get hung up with partisan bickering.
Prior to passing the short-term CR, the Senate approved and sent to the White House the National Defense Authorization Act (NDAA), that increased defense spending by 10%, a move that has broad bipartisan support. The final Senate vote on the NDAA was 83 to 11. All 11 NO votes were cast by Democrats who think defense spending is too high. Passage of the NDAA sets to stage for higher DoD spending in the Omnibus Spending Bill.
There are many Republican skeptics concerned that the new Republican House majority will have a very tough time getting much legislation passed as they negotiate differences within their caucus. The challenge is being played out as Republican Leader Kevin McCarthy fights to get the 218 votes needed in order to become the next Speaker. With only 222 Republicans members in the new House a very small minority of Republican Members can deny McCarthy the Speaker’s chair as no Democrats are likely to vote in favor of McCarthy on the key vote. While the two parties vote for their leadership team inside their respective caucuses, the vote for Speaker is held by the entire House, so it would be possible to have some crossover of Democrats in the Speaker’s vote. The threat of crossover voting is the concern McCarthy and others are warning of when they urge party unity on the vote for Speaker.
In fact many in DC believe that McCarthy is talking NO on the government funding legislation but hoping YES on the yearend spending bill. His political calculus is that the conservative members, whose votes he needs to be elected Speaker, will oppose the vote for the large Omnibus Spending Bill when it comes before the House; but with all the challenges of his incoming majority he knows how difficult it will be to pass a bill funding the government in the early days of Republican House rule. A government shutdown in the early days of Republican House control would not be a good way to start his leadership.
As this week proceeds there will be headline risk of a government shutdown as Congressional Leaders face the task of getting 60 Senate votes for the $1.7T spending package.
Fed outlook
Last week saw the final Federal Open Markets Committee (FOMC) meeting of 2022. The next meeting on rates and Fed press conference is scheduled for February 1, 2023. Markets reacted very negatively to the hawkish impression many took from the meeting and the Chair’s presser after the meeting.
My take was a little different, as I believe Chair Powell left a further rate decrease, to 25 bps, on the table during his presser. When asked about the possibility of a 25pbs points move at the next meeting he didn’t dismiss the possibility. Compare his comments on 25bps to those he made in response to a question of changing the 2% target for inflation. On the 2% target Powell gave a clear No, not going to happen; but on future rates he was less committal.
The Chair continued to make clear that the Fed continues to believe that being too tight with policy is better than giving up the fight prematurely, but he continued to make the point that the FOMC will be data driven.
As I have written before, the Chair’s presser is somewhat unique in DC as it is basically fact checked three weeks later when the minutes of the FOMC meeting are released. My guess is that the Chair’s response on the idea of a 25bps move was cautious as there were more dovish comments made by Committee members during the meeting. His comments made clear that there was little to no support for a pivot, but just as this month’s move from 75bps to 50bps wasn’t viewed as a pivot, would a move from 50bps to 25pbs be viewed as a pivot or just as a move dictated by incoming data?
FTX
The House and Senate held hearings last week on the FTX bankruptcy. Obviously, the arrest of SBF took away the star witness. Yesterday on “Meet the Press” Senate Banking Chair Sharrod Brown raised the potential of a temporary ban on crypto, but acknowledged that the global implications would need to be considered. Here’s his press statement issued prior to the Senate hearing, clearly a top issue for financial services in 2023.