While, in the coming two weeks, all political eyes in Washington will be on final runup to the midterm elections and the battle to control Congress, markets will be focused on this Thursday’s release of 3^rd Quarter GDP and the Fed’s Federal Open Markets Committee (FOMC) meeting on November 1-2. The FOMC will put the Chair’s post-meeting press conference and his remarks on the economy in the middle of a news cycle six days before America goes to the polls to vote. As all polls show that voters are focused on the economy and inflation it makes the Fed’s decision a potential political football as both sides make their closing arguments.

In my view the timing of the FOMC meeting is somewhat curious as the goal of the Fed over the years has been to try and stay above the day to day political fray in DC. It is hard to see what Chair Powell can say that isn’t used in the final days of the election debate.

There appears to be near unanimity that the Fed will raise the base rate by 75bps at the November meeting, but the key will be the press conference the Chair has after the meeting. Obviously, he will explain that the battle against inflation and the continued elevated CPI and tight labor markets required the Committee to act. However, if he looks too optimistic about the future Republicans will be critical, and too gloomy a forecast will hurt Democrats. By putting the decision so close to the election the Fed has put itself into a political no-win position. Most of the time the FOMC meetings are only of interest to economists, but during periods of rate changing policy decisions the meetings are always big news. It is not a set rule that the November meeting occurs days prior to an election, the Fundstrat data science team has put together an interesting chart that shows in many election cycles the FOMC meets after the election:

Good luck Jay Powell!

Elections

During the past week there has been no event that has changed the basic view that Republicans are likely to capture control of the US House and that the battle to control the Senate remains too close to call.

While my general view is that candidate debates seldom change the outcome of an election there are exceptions and tomorrow night could be one of those exceptions when Pennsylvania Lt. Governor John Fetterman meets challenger Dr. Oz. Fetterman held a substantial lead in most of the polls through the summer, but in recent weeks Oz has caught up and the race now appears to be a toss-up. A central issue has become Fetterman’s health and the degree he has recovered from a serious stroke in May. Fetterman has had mixed results in big interviews and at times has needed a closed captioning devise in order to fully understand the questions. This has raised issues as to his ability to serve in the Senate where debate can be core to the job assignment. Proving himself capable of holding his own in a debate with Dr. Oz could switch momentum back to the Democrat.

Polls continue to show a close race in Nevada where Democratic Senator Cortez Masto is being challenged by Republican Adam Laxalt, the heir to a famous Republican name in Nevada. In addition to the close race for the seat held by a retiring Republican in PA, Republicans are also defending seats in OH, NC, and WS, where Republicans are ahead in most polls but the results are within the margin of error. The Democratic seat in Georgia is also close, but incumbent Senator Warnock has held a lead over challenger Walker for the last month.

Nate Silver’s much watched FiveThirtyEight polling forecast gives Democrats a 58 percent chance of keeping control of the Senate, down from a peak of 71 percent last month.

Debt Ceiling

An issue to watch in the coming weeks is the need to increase the national debt ceiling. The debt ceiling dates back to 1917 as a political compromise to allow for increased debt to fight WW I, it now is a political hurdle that needs to be overcome and has been increased over 90 times in the last 100 years. It has been a difficult issue for Congress to deal with dating back to my days on Capitol Hill in the 1970s – little has changed.

The current debt ceiling of $31.4T was established in late 2021 and was designed to last through the 2022 elections. While it is up to the US Treasury to notify Congress when the debt ceiling needs to be raised it is believed that the current ceiling will be reached sometime next year. This will require a ceiling increase in order to avoid a default on US Treasuries – clearly an unacceptable policy outcome.

There has been some discussion of Democrats trying to pass a debt ceiling increase in the post-election lame duck session of Congress in December, but that may be a challenge with so few legislative days before the new Congress takes control on January 3^rd. The debate was not helped when President Biden said last week that eliminating the debt ceiling would be “irresponsible.” Republican Leader McCarthy continues the political rhetoric of referring to the debt ceiling as the national credit card. At some point next year the Treasury will officially notify Congress of a debt ceiling deadline and headline risk from DC will rise sharply. It is an issue to follow in the coming months.