The long awaited speech by Fed Chair Powell set the tone for further rate increases as markets anticipate the next meeting of the Federal Open Markets Committee (FOMC) on September 20/21.
As Chair Powell spoke he was likely haunted by his remarks in 2021 when he addressed the potential transitory nature of inflation, a position he reset in 2022. For this year’s speech he was short and to the point: more hikes are coming. As analysts commented on the speech the only open question was the size of the September increase: 75 or 50 bps. The Chair talked tough that pain may be needed to overcome inflation; but he seemed prepared to shock the economy to achieve the goal of 2% inflation. He even invoked the name of fabled inflation fighter Fed Chair Paul Volcker.
The Fed Chair is scheduled to participated in a Conference on Monetary Policy sponsored by the Cato Institute on the morning of September 8 where he will have the opportunity to update his views when the FOMC meeting will be just two weeks away.
Congress and the budget
The US Government’s new fiscal year begins on October 1, and as we have seen in the past failure of Congress to pass some sort of stopgap measure leads to a government shutdown. Both political parties seem committed to avoiding a shutdown; but there are several obstacles that could get in the way.
The first potential issue is the Senate where a filibuster threat raises the margin for passage from 51 votes to 60; meaning that the vote will need to be bipartisan. Republican Leader McConnell has been clear he does not want to see a government shutdown a month before an election; and he certainly doesn’t want a shutdown the is blamed on Republicans. But he has a number of Members who seem to find objecting to regular order part of their DNA, but he should be able to find 10 of his 50 Senators who will join a vote to keep the government open.
Perhaps a bigger obstacle at this point is progressive Democrats in the House who may object to incorporating a provision in the Continuing Resolution (CR) that would expedite the approval process for some energy projects including pipelines and drilling for traditional fossil fuels. This provision was part of the deal that got Senator Manchin to support the Democratic Inflation Reduction Act that passed earlier this month. While the deal was agreed to by Biden, Schumer and Pelosi it could be a challenge for Pelosi to hold her paper thin majority in the House together.
The CR is likely to be the only major piece of legislation that Congress passes prior to the midterm elections. When working on Capitol Hill we referred to this type of legislation as the last train leaving the station; in other words if a Representative or Senator has a pet project they want to see passed before the election it is this bill or nothing. Manchin knows that the CR is a must pass bill and he will work hard to get the commitment he received into the legislation.
The Senate doesn’t return until September 13 giving Congress only 17 days to resolve the issue of government funding.
While there has been a lot written on the improving prospects of Democrats in the upcoming midterm election, the fact is that since the Civil War the party controlling the White House has lost seats in all but four midterms and while President Biden’s numbers have slightly improved the fact remains that over 50% of the nation disapproves of his job performance. All this helps to explained Republican optimism; especially in the House.
Last week Democrats were heartened by the results in a special election in New York where they held the seat of a Democrat who left the House to serve as Lt. Governor of New York. While the Democratic incumbent won in 2020 by double digits; it is a swing district that President Trump carried in 2016; but that Biden won by 2 points in 2020.
Republicans believed that they had a good shot at the district with Biden’s unpopularity and the poor economy; but the Democrat campaigned hard on the abortion issue which has proven to be a vote getter for Democrats. Politicians of both parties were impressed with the vote in Kansas when an anti-abortion constitutional amendment was defeated by nearly 20 points. Democrats look at the New York special results as another confirmation that abortion could be the issue that helps the party defy the midterm odds. Recent national polls show some improvement for Democrats but nearly all election modeling shows Republicans capturing the House.