Last week House Republicans narrowly passed their debt ceiling and spending reduction proposal. The legislation increased the debt limit by $1.5T, or until April 1, 2024, whichever comes first. Since many Republicans generally oppose increasing the debt ceiling, the Republican Leadership combined the $1.5T ceiling increase with proposed cuts that would total $4.5T over a ten-year period. In fact, the day before the vote, the Republican leadership got a big boost when the non-partisan Congressional Budget Office (CBO) estimated that the cuts in the bill could reduce spending by $4.8T over ten years.
Passing the debt ceiling bill was a major test for Speaker Kevin McCarthy’s leadership. In the end he was able to barely eke out a one vote victory with the final tally being 217 Y to 215 N. Legislation dies on a tie vote. In the end four Republicans voted against their leadership, but the promise of major budget cuts and new tough work requirements for social welfare programs gave the other conservative Republican House members a framework they could support.
A victory was essential to Speaker McCarthy as key to his game plan is to get President Biden and Senate Democrats to sit down with him and try to negotiate a bipartisan budget and debt ceiling bill. As the Speaker was able to proclaim after passage of the Republican plan – only the Republican House had actually passed a bill increasing the debt ceiling.
However, at the center of the Speaker’s challenge is that he was only able to get his bill over the finish line by including cuts that will never pass the Senate or be approved by the White House. Indeed some of the more moderate Republicans who supported the bill as a vehicle to start budget talks made clear that they would be unlikely to vote to for a final piece of legislation that had these deep cuts.
With a House-passed bill the real challenge now begins as the two sides have to see if there is any middle ground. The Republicans kept their commitment not to cut Social Security, Medicare or defense meaning that the entire $4.5T was in other programs and by necessity making deep cuts in some areas. The Republican bill also cut back many of the clean energy measures that were included in last year’s Democratic centerpiece legislation, the Inflation Reduction Act (IRA), and other social welfare programs including programs ranging from VA programs for veterans to child nutrition formerly referred to as food stamps. As the final vote approached and the Speaker realized how precarious his margin was he was forced to restore cuts for ethanol tax incentives which had threatened to lose the support of Representatives from Iowa for the bill. Ethanol has become a huge user of US corn production and hence support from the midwestern Republicans.
Now the ball is in the court of the White House and Senate Democrats as they develop a strategy to deal with the Republican alternative. The White House has stuck to its position that the full faith and credit of the US Government is not negotiable and wants a clean debt increase bill. However, since the House acted more Democrats are urging the President to sit down with McCarthy and start talks.
The political reality is that the 217 YES votes by House Republicans was a hard fought high water mark for Republicans in their debt ceiling vote count. Several members of the conservative Republican House Freedom Caucus have been clear that they will not support any future debt ceiling increase that doesn’t include all the cuts made in last week’s legislation. The House bill has no chance of becoming law, and the final bill will need Democratic support as the final product is likely to lose more than four House Republicans.
While the Treasury has not yet established an “X date” when the ceiling must be increased, getting some budget/debt ceiling bill will be a huge test of Speaker McCarthy’s leadership as in the end the final product will need to be bipartisan. The Speaker and the President will need to find some common ground.
FOMC meets
This Tuesday and Wednesday the Fed’s Federal Open Markets Committee (FOMC) meets to determine the future course of interest rate policy. The consensus is that the Committee will again raise rates by 25bps, but, as Fundstrat has made clear, this is likely to be a “dovish” rate increase.
After the Committee concludes its meeting on Wednesday Chair Powell will have his traditional post-meeting press conference, and for those following the Fed and markets the 2:30 presser will be must watch TV. As I have written before, when the Fed Chair addresses the press after the meeting the Chair knows that his comments will be fact checked in the summary of the meeting three weeks later when the minutes are released. The Chair can’t be caught not giving a fair analysis of the mood of the Committee.
We learned a lot from the minutes of the March meeting when it was made clear that in a departure from earlier meetings there were Committee members who raised the possibility of a pause, especially after the failure of SVB only days before the FOMC March meeting. The last minutes also put on the pubic record concern within the Fed staff that a recession could be on the horizon. With falling inflation numbers and parts of the economy slowing there is likely to be increased support for a pause in the Fed’s march to higher rates. The Chair’s post-meeting comments and the subsequent release of minutes could put a dovish tone on this week’s action.