Congress returns to DC this week after a break for Presidents Day. The break included global travel by both the President and leaders of Congress with the focus on the war in Ukraine. Last week started with President Biden’s surprise visit to Kyiv and the participation of both the President and Republican Senate Leader Mitch McConnell in the Munich Security Conference where both assured NATO that the US leadership is committed to supporting Ukraine in its war against Russia.
With some factions in the Republican Party questioning Biden’s policy in Ukraine, the strong support from the Republican Senate Leader was an important development. Here is a link to the McConnell statement.
While there may be some Congressional skirmishes around aid to Ukraine, the real debate is likely to occur in the late summer when Congress must deal with passing a budget or a Continuing Resolution (CR) before the start of the new fiscal year on Oct. 1, 2023.
Shutdown vs Default
Ukraine funding and indeed all spending priorities will be the focus of the Congressional debate as the House and Senate struggle with the need to have a budget or a Continuing Resolution (CR) in place by the beginning of the new fiscal year on October 1. As we saw during periods of divided government during the Obama Administration a failure to agree by the October 1 deadline can lead to a partial government shutdown. The ongoing debate about the debt ceiling, and a possible government default has clouded the issue as the terms shutdown and default have sometimes been used interchangeably.
The debt ceiling is the statutory limit of debt the government can have outstanding at any one time and hitting the ceiling can cause a US Government default if new money to pay debt, interest and bills can’t be raised by the Treasury. While the failure of the US Government to make payments will likely cause chaos with currency and capital markets, the government would stay open.
On the other hand if there is not government spending authority in place when the new fiscal year begins on October 1, the government responds by shutting down non-essential services, a partial government shutdown.
Divided government adds to the challenge of achieving both goals, budget and debt ceiling, and both will be the focus of talks between the Biden White House and the Republican House in coming weeks and months. The debt ceiling and default risk comes first when the Treasury announces a date when all bills can’t be paid, likely sometime this summer. The shutdown occurs on a date certain, October 1, if no budget or continuing resolution is in place.
FOMC minutes
Last week the minutes of the Fed’s Federal Open Markets Committee (FOMC) from their early February meeting were released. Here is a link to the minutes.
As most Fed watchers commented there was little in the minutes to indicate any meaningful change in Fed thinking. As before, the minutes have a safety valve that would allow the Fed to become more dovish or hawkish if the data would change, and this month’s CPI didn’t give much comfort to the doves.
Here’s the quote that struck me as giving them the out to move either way if events warrant.
“Participants generally noted that the Committee’s future
decisions regarding policy would continue to be in-
formed by the incoming data and their implications for
the outlook for economic activity and inflation. A num-
ber of participants observed that financial conditions
had eased in recent months, which some noted could
necessitate a tighter stance of monetary policy.
Almost all participants observed that slowing the
pace of rate increases at the current juncture would allow
for appropriate risk management as the Committee assessed
the extent of further tightening needed to meet
the Committee’s goals.”
I thought it was interesting to find that, in the minutes, while the majority view was for a 25bps increase, there were some on the Committee who would have liked a 50bps increase. There was no mention of any discussion by the Committee of a pause to see what the impact has been of increases to date.
These minutes and recent comments from Fed officials, plus incoming data this month would make another 25bps increase in late March seem pretty certain. But the meeting isn’t until March 20/21 so February data will come in before the meeting.
Before the next FOMC meeting in late March the data for inflation and employment for February will be released. The Fed Chair has made clear that their decisions are data driven; but today it appears all the tea leaves point to another 25bps increase in March.
Senate 2024 Election
In the 2024 race for control of the Senate, Republicans appear to have an advantage with 23 of the 33 seats up are currently held by Democrats and several are in Republican states. Three of the Democratic held seats that have gotten the most attention are in Ohio, Montana and West Virginia. In 2020 Trump won each of these states by wide margins. These will be very tough races for Democrats to win, and the general view is that the best chance they have of holding on to these critical seats is if the incumbent Senators seek re-election.
Last week Montana Democratic Senator Jon Tester ended speculation on whether or not he would seek re-election by announcing his plans to run. Several weeks ago Ohio Democratic Senator Sharrod Brown announced his plans to seek re-election. This leaves Senator Manchin as the lone holdout of these three tough Senate races for Democrats. The other race that Republicans are looking at with expectations of a win is Arizona where Senator Sinema has left the Democratic Party to be an independent. If Democrats run a candidate, and there is a three way race, the Republican candidate is likely to be the favorite to win.