The need to increase the debt ceiling has emerged as the top issue in DC. The Congressional deadlock took on new urgency last week when Treasury Secretary Janet Yellen surprised markets and political leaders when she put out a statement that the X-date for Treasury funding may be as early as June 1. This leaves only three weeks for Washington to find an exit strategy for the government hitting the statutory debt ceiling.
Two weeks ago House Republicans eked out a one vote victory in a bill on their debt ceiling/spending plan. The bill was a move by Speaker McCarthy to get President Biden to sit down to try to negotiate a budget and debt ceiling deal.
The Republican House legislation would increase the debt ceiling by $1.5T or until April 1, 2024 whichever comes first. In order to get fiscally conservative Republicans to vote for the bill the proposal cuts over $4.5T in spending over 10 years.
The House passage of the debt ceiling bill achieved Speaker McCarthy’s main goal of getting talks started with the White House when President Biden invited the Speaker and the other Congressional leaders to the White House on Tuesday. The meeting will be the first head to head talks between the Speaker and the President on the debt ceiling since February. While the Senate leaders have been invited, Senate Republican Leader McConnell has been clear that for the time being he and his Senate Republican colleagues will follow the lead of Speaker McCarthy and the House Republican majority.
In fact, to emphasize the point, Senate Republicans sent a letter authored by Senator Mike Lee to Senate Majority Leader Schumer saying they won’t support cloture on a debt ceiling bill that does not have spending and budget provisions. Here’s a link to the letter.
Why is this letter important? Under Senate rules the bill to increase the debt ceiling is subject to a filibuster and it will require at least 9 Republican Senators to support cloture. Senator Lee has gotten 43 of the 49 Republican Senators to sign the letter. The signatories include Senator McConnell and his leadership team.
The political reality is that the final debt ceiling bill will require some House Republicans to vote YES and at least nine Senate Republicans to vote to invoke cloture and bring the bill up for a vote.
As I have written before it is a very tough vote for many Republicans to vote to increase the debt ceiling. Speaker McCarthy was able to get nearly all the fiscal hawks to vote for his $1.5T increase only because it had $4.5T in cuts, and everyone knew it was a “message” bill to get President Biden to the table to negotiate. The challenge the White House and Republican leaders face can be seen in the vote back in 2019 when President Trump worked with Congress to increase the ceiling. The Trump-supported bill slowed the rate of spending growth and suspended the debt ceiling for two years, until July of 2021, in order to remove the toxic debt ceiling issue from 2020 politics.
But look at the votes on the Trump debt ceiling bill: in the Senate the Republican leadership worked with President Trump to get the bill passed and it was approved by the Senate on a vote of 67 to 28, well above the 60 vote threshold a bill needs to invoke cloture and overcome a filibuster. But in the House it was a different story.
The bill passed the House on a vote of 284 to 149; but only 16 Democrats voted against the Trump supported legislation. On the Republican side 133 Republicans voted NO. To get a bill passed this year only four Republicans can vote NO, and that assumes every Democrat will vote YES. There are five Democratic House members who represent Republican districts that Trump carried in 2020, and they may tell the leadership that they are a NO vote on the debt ceiling bill. To pass the debt ceiling bill will likely require support from at least two dozen House Republicans.
Tuesday all attention will be on the White House as Biden and Congressional leaders meet. President Biden has a long career in Washington of finding compromises; the debt ceiling talks will be a big test for that experience.
FOMC
Last week, as expected the Fed’s Federal Open Markets Committee (FOMC) raised interest rates by 25bps, but both the meeting statement and the Chair’s post-meeting presser set the stage for a possible pause at the next FOMC meeting June 13/14.
As I have said in past notes the Fed Chair conducts his post-FOMC presser knowing that three weeks later the minutes from the meeting will be released and hence fact check his comments on the meeting. The Fed minutes are highly scrutinized by the Fed staff and all the members of the FOMC – hence the three week lag time. When asked if there was support for a pause, Chair Powell said, wait to read the minutes.
However, Chair Powell made clear that there was broad agreement at the meeting for the 25bps increase but indicated that there were Members who felt the time to pause was approaching. As always Powell made clear that decisions would be data driven, but that dropping the previous language that said the Fed “anticipates” additional tightening was a meaningful and important sign that a course correction may be approaching.