While Wednesday may be a slow news day as investors and everyone else make final preparations for putting turkeys in the oven, for financial markets it is a big day as the Federal Reserve releases the minutes from the November Federal Open Markets Committee (FOMC) meeting. As I have written before, the minutes act as a fact check on the Chair’s press conference held after each FOMC meeting.
The November meeting saw a toned down release from the Committee, but a hawkish Fed Chair. However, at the press conference Chair Powell made clear there was no pause in the offing and that it was better to raise too much rather than not enough. He did say that a slower rate of increase could come at the December meeting. The release of the minutes this week will tell Fed Watchers whether the meeting had a discussion if there was a willingness to lower the pattern of 75bps increases, which is my suspicion. The minutes, in addition to official comments by the FOMC members, can give a good signal as to where the Fed is headed.
As Chair Powell has done a good job of telegraphing policy and while there has been a chorus of remarks indicating that a pause is not in the cards for the next meeting, there are several signals that the string of 75bps increases may have come to an end. With Fundstrat reporting on the positive signs with respect to the fight against inflation, Chair Powell will have a chance at his presser after the December 15 rate announcement to again telegraph where the FOMC may be heading in the new year.
Lame Duck
While last week saw important announcements related to 2023 and 2024, with Pelosi bowing out and Trump jumping back in, Congress needs to return after Thanksgiving to finish the work for 2022.
The most urgent piece of business is the need to pass a government budget bill prior to the December 16 expiration of the current Continuing Resolution (CR). The Congress has two options in order to avoid a government shutdown.
The most likely course of action is to pass a so-called Omnibus Spending Bill that funds the entire US Government through the current fiscal year that runs until October 1, 2023. This clears the deck for the next Congress and avoids another government shutdown crisis until October of next year. Republicans may decide that they want to use their newly won House majority to have an impact on the budget for the current year and pass another CR that could run until February or March of next year. However, this would put another government shutdown deadline on the agenda for the new House Republican majority and could be a distraction from their efforts to organize House Committees and focus attention on issues ranging from Hunter Biden to immigration and crime. There is also a strong push from Defense advocates who believe the DoD needs their new budget with new priorities and that it is not in the national interest to have Defense and other departments of government continue to run on the FY 2022 budget spending priorities.
Debt Ceiling
One of the toughest decisions Congress may need to make in the lame duck is whether or not to increase the debt ceiling. The debt ceiling was last raised in December of 2021 by $2.5T to $31.3T which was designed to get past the 2022 elections. The Treasury, which issues the government debt under the ceiling, is the official manager of the ceiling. As the Treasury approaches the ceiling that would limit their ability to issue more debt, the Treasury Secretary sends an official notice to Congress with an expected date of when the ceiling would be reached. The Treasury has not indicated that a debt ceiling increase is imminently needed and most experts expect the ceiling to be reached in the second half of 2023.
One option that is being discussed is to put a debt ceiling increase into the Budget Bill that must pass by December 16. At this point the Republicans haven’t decided if they will cooperate in an effort to increase the ceiling in the lame duck. As the budget bill has a 60 vote threshold in the Senate, Republican support will be required if action is to be taken as part of the budget funding process. Obviously at some point the debt ceiling will become a must pass bill; but even talk of a US Government default creates headline risk for markets.
FTX
The House Financial Services Committee issued a bipartisan announcement that they intend to hold a hearing next month on the collapse of FTX. The Committee press release announced that they expect to hear from the companies and individuals involved, including Sam Bankman-Fried, Alameda Research, Binance, FTX, and related entities, among others. In addition to these names in the Committee release, I would expect the lead financial service regulators to also testify.
No date has been set but there is obviously going to be a great deal of interest in the bankruptcy. The Congress is likely to focus on consumer losses and what protections should be added to benefit crypto investors.
The Torch is Passed
One of my favorite modern Presidential speeches is JFK’s inaugural and the line that “the torch is passed to a new generation of Americans.” In the House we are seeing the passing of the torch with decision by Speaker Pelosi to step aside as the Democratic Leader. It appears that Kevin McCarthy (57) will lead the Republicans and Hakeem Jeffries (52) will lead the Democrats. In the Senate the torch is still in the hands of an older generation with leaders Schumer (72) and McConnell (80). And of course the last two Presidential candidates were Biden (80) and Trump (76).