Last Thursday Treasury Secretary Yellen followed up on her earlier letter to Congress and officially notified them that the US had reached its statutory debt ceiling limit and that she, like her predecessors, would start using certain “extraordinary measures” to make sure the ceiling isn’t breached. Here is a link to the official communication from the Secretary to the Congress from last Thursday.
During the Trump Administration Republicans on three occasions took care of the debt ceiling without any grand bargain to reduce government spending. This year with Republicans controlling the House Speaker, McCarthy has insisted that in order to get Republican support for a debt ceiling suspension or increase there will need to be negotiations between the House Republicans and the White House.
Secretary Yellen has stated that the Treasury Department should be able to avoid a US Government default until at least June by using “extraordinary measures.” While House Republicans have been very public about their demand that the White House and Republicans negotiate a spending reduction package, to date Republicans have not presented a list of what areas they would like to cut. Last week the path to a resolution was further complicated when former President Trump issued a statement that social security and Medicare should not be cut as part of the debt ceiling legislation.
Speaker McCarthy has put himself in a box with the promises he made in order to secure his Speakership. He committed to not increase the debt ceiling without cuts in spending, an idea that has little support in the Senate or the White House. Speaker McCarthy has been very public in calling for talks with President Biden and Senate Democrats. This weekend swing Democratic Senator Joe Manchin joined those calling for talks. With the President’s State of the Union address scheduled for Tuesday, February 7, it seems as though this may be a target date to start the process.
While Defense spending is only around 10% of all federal spending, it makes up nearly 50% of all discretionary spending. With priorities that range from school lunch programs to critical infrastructure it will be a challenge for Republicans to come up with cuts in discretionary program that can pass Congress. With only a five seat majority in the House, finding cuts that are approved by Speaker McCarthy’s conference will be no easy task. Plus as we saw last week, former President Trump won’t hesitate to put himself in the middle of the talks.
Talks between the Speaker and the President appears to be McCarthy’s current exit strategy for a debt default crisis.
At the World Economic Forum JPM Chair Jamie Dimon warned of the dangers of playing politics with the national debt, and most economists and policy experts warn of the major issues that surround any threats for a USA default.
Time frame: Secretary Yellen has told Congress that the best estimates done by the Treasury indicate that the debt ceiling can be handled with extraordinary measure until June, maybe later. Congress seems to wait for deadlines before acting; hence it is unlikely that a plan to increase the ceiling will come together until there is deadline for default.
Fed
The next meeting of the Federal Open Markets Committee (FOMC) is fast approaching with the meeting scheduled for January 31/February 1. As I have written in the past I give Chair Powell an A for telegraphing policy to make sure markets aren’t surprised. I think all the signals point to a 25bps increase at the upcoming meeting. Last week Fed Vice Chair Lael Brainard said in a Chicago speech: “Even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2% on a sustained basis.”
At his press conference following the December FOMC meeting Powell didn’t dismiss the possibility of a 25bps increase in February, and the minutes had clues that a lower rate of increase may be in the cards.
With the inflation numbers all moving in the right direction there will be a lot to look for on February 1 both in the official Fed statement and the Chair’s presser after the meeting.
House Hearings
The next two years in DC will likely be dominated by hearings held by Republican House Committees designed to put a spotlight on issues they believe will hurt Democrats in 2024. House Committee Chairs have total control over their Committee’s agenda and with the Senate controlled by Democrats, and Joe Biden in the White House, legislative victories will be hard to come by; but hearings are an easy way for Republicans to get their message out.
Last week the House Oversight Committee announced hearings for the week of February 6 on the crisis at the Southern border. Immigration and building the wall were central issues during the Trump Administration. The former President continues to play a big role in the Party and hearings on immigration play into a central Republican message.
There seem to be daily reports of the problems the flood of illegal immigrants is causing on the border. The hearings will feature those Biden Administration appointees who run the relevant agencies, and officials from border communities.
While the main purpose of the hearings will be to embarrass the Administration, at some point it could lead to some bipartisan bill as both parties concede the immigration process is broken.