Last week Fed Chair Powell spoke at a virtual monetary conference sponsored by the Cato Institute. The session format was a little different as the Cato President was able to ask questions of the Chair. Powell in his comments was clear: the Fed is committed to bring down the rate of inflation to 2% and it will do so even if it brings some pain to the economy.
The speech reiterated the policy the Fed Chair made clear at his Jackson Hole speech that the Fed will not blink, it will continue to hike rates until the rate of inflation slows. A key issue for Powell is that businesses and consumers don’t develop inflationary expectations as in the 70s and 80s when Fed Chair Paul Volcker raised interest rates as high as 20% in June of 1981. The Chair stated that such expectations are not in the economy today, but swift, consistent action is the key to making sure that those expectations don’t start to emerge.
The FOMC meets on September 20/21 and there is one more important data point to come out prior to the meeting when the August CPI is released Tuesday morning. Under Powell the Fed has been telegraphing policy and to date all indications point to a 75 bps increase for September. The other point that the Chair is making clear is the fact that the Fed will not declare victory prematurely and that rates will remain elevated until there is success in restoring inflation to the central bank’s goal of 2%.
Made in DC crisis
The House returns this week giving Congress under three weeks to pass legislation keeping the government open when the new fiscal year begins on October 1. Government shutdowns caused by the failure of Congress to pass a budget bill is a classic “made in DC” crisis. There are no external threats, economic surprises – just an inability for Congress to reach an agreement.
In theory, the government should have new budgets in place as the new fiscal year begins, but that has been achieved much less frequently in recent years. Instead, the government has operated for months on a so-called Continuing Resolution (CR) that maintains spending at current levels. However, the Congress can increase or reduce any line item in the budget as part of the CR. In fact, the Biden Administration has outlined a $47B supplemental request for funding that they want put into the CR. These funds range from more money to defend Ukraine to emergency money for regions of the country hit by floods and massive fires.
In the Senate, leaders will need to find at least 10 Republicans who will vote with Democrats to avoid a filibuster over the CR. McConnell and other Republican leaders don’t want the Party to be blamed if a government shutdown would occur. Democratic leaders are concerned that progressives will insist on their priorities that could cause problems in some more conservative swing districts in House races and lose all Republican support.
One big challenge that is emerging revolves around the commitment Schumer, Pelosi and Biden all gave to West Virginia Senator Joe Manchin that they would give the Senator a vote on his proposal to speed the regulatory approval process for high priority energy projects. Senator Bernie Sanders and a group of 70 House Democrats have vowed to vote against the CR if the Manchin energy regulatory provision is included. Senator Schumer has stated that it is his intent to include the Manchin proposal in the “must pass” legislation.
Investors don’t like hearing of government shutdowns. Therefore, expect some headline risk in the coming weeks as Congress tries to find the roadmap to pass the CR. They know that the CR must pass but nothing in DC is easy.
As I have written, while Democrats have had some tailwinds related to the national debate on abortion and the slight increase in Biden’s approval ratings, they continue to fight a strong historical trend where the party in the White House loses seats in midterm elections. In fact, since the Civil War this trend has occurred in all but four House midterm elections. With the narrow five seat majority House Democrats have today, it would only take a small Republican pickup to change control, and most observers expect that to happen.
In the Senate the math is more complicated. In the House all 435 seats are up, but in the Senate only 34 of the Senate seats are up this year. 20 of the 34 seats are currently held by Republicans, and incumbents in Ohio, Pennsylvania and North Carolina are retiring, making the races more competitive.
Both parties have identified ten seats – five held by Republicans and five held by Democrats – that are likely to determine who controls the Senate.
The Republican-held seats include the three mentioned above where the Republican Senator is retiring, plus Wisconsin and Florida where polls show the Democratic challenger doing well.
For Democrats, their incumbents in NH, GA, NV, CO, and AZ are all running in states that were close in the 2022 Presidential race and have well-funded Republican challengers.
Labor Day is the traditional beginning of political campaigns, making pre-Labor Day polls less reliable, but in coming weeks I will be closely watching these ten races.