After a two week break for the Easter/Passover holidays Congress returns this week with the increased focus on how House Republicans can develop a strategy to increase the debt ceiling
While the focus of debt ceiling talks will remain in the House, the Senate has key judicial nominations and confirming a new Secretary of Labor on their agenda. This should be made easier with the return of Democratic Pennsylvania Senator John Fetterman. However, Senate Democrats will still only have 50 Senators as California Senator Feinstein remains out with a serious case of shingles. There have been increased calls for the 89 year old Senator to resign and allow Governor Newsom to appoint a replacement. This puts the California Governor in a difficult situation as several leading Democrats are already running to replace Feinstein who had previously announced she would not seek re-election next year. Obviously, an appointed Senator would have a leg up on the field. However, in order to get the President’s agenda through 51 Senate Democratic votes makes it easier than a 50/50 tie. A tied Senate gives a great deal of power to moderates Manchin and Sinema.
On the Republican side of the aisle Senate Republican leader Mitch McConnell who was out for over a month after having a concussion will return. While his top lieutenants kept the trains running, the Kentucky Senator is a skilled legislative practitioner and having him back will make negotiations with Senator Schumer and the Democrats run slightly more smoothly.
Debt Ceiling
Prior to the Easter/Passover break, Speaker McCarthy sent a letter to the President urging another sit down to begin serious talks about a compromise bill. The response from the White House was less than enthusiastic and no date for new talks has been set. The Administration makes the fair debating point it is hard to negotiate when only one side has put anything on the table. The White House has unveiled the President’s FY 24 budget, but to date McCarthy and House Republicans have not introduced an alternative.
In his letter to President Biden the Republican Leader did mention some issues that might help reach a compromise such as new money and policies on the Southern border, and new initiatives to expand exploration for fossil fuels. However, the big issue is spending cuts with Republican cuts in non-defense spending programs. One idea that has been suggested by some Republicans is to have the House pass a one-year suspension of the debt ceiling tied to spending cuts; but that idea is unlikely to draw much support from the Senate or White House.
The Treasury Department has not revised its initial estimate of the “x-date” for the debt ceiling as being in June; other fiscal experts believe it to be later. Washington often works best when faced with a deadline, hence, it is not clear that a bill can gain momentum months ahead of the showdown.
Fed
Last Wednesday the Fed released the minutes from the March meeting of the Federal Open Markets Committee (FOMC). The headline grabber was the comment that the Fed staff thought a recession later this year was more likely after the banking industry troubles, but they have been wrong over this inflation cycle and there appeared to be little support from the members of the Committee.
I thought of particular interest was a significant change in the most recent minutes from the February meeting’s commentary. The February minutes indicated that while the increase was 25bps some members thought that a 50bps increase might be appropriate. The February minutes made no mention of any support for a pause. This meeting there was a mention that there were some that thought 50bps might be appropriate but those Committee members backed off with the bank sector troubles. However, in the March minutes they did say that there was some sentiment for a pause. I thought that this was a key commentary.
“Several participants noted that, in their policy deliberations they considered whether it would be appropriate to hold the target range steady at this meeting. They noted that doing so would allow more time to assess the financial and economic effects of recent banking-sector developments and of the cumulative tightening of monetary policy. However, these participants also observed that the actions taken by the Federal Reserve in coordination with other government agencies helped calm conditions in the banking sector and lessen the near-term risks to economic activity and inflation. Consequently, these participants judged it appropriate to increase the target range 25 basis points because of elevated inflation, the strength of the recent economic data, and their commitment to bring inflation down to the Committee’s 2 percent longer-run goal.”
The FOMC meets again on May 2-3, which means there will be more data for the Committee members to digest prior to the meeting. Interestingly, all talk of a 50bps increase has completely disappeared, and the focus of discussions is between a 25bps increase and a pause. At this point I truly believe that Chair Powell and the others on the Committee are still digesting incoming data and that both options are on the table.
Here is the link to the March meeting minutes.