Last Wednesday the Federal Reserve released the minutes from the November FOMC meeting. At the time of the meeting the Committee released a rather dovish statement that was followed by a more hawkish Chair press conference. At the time I cautioned that, while hawkish, the Chair made clear that a step down from the 75bps increases was possible at the December meeting. The minutes made clear that there was indeed a consensus among FOMC members that economic conditions make a stepdown in rate increases very much on the table for the next meeting. Here’s a quote from the minutes:
“Nonetheless, contacts were increasingly focused on the question of when the Committee
might slow the pace of future increases in light of the substantial tightening of financial
conditions that had occurred over the year. Most respondents to the Open Market Desk’s
surveys viewed a 50 basis point increase in the target range for the federal funds rate at the
December meeting as the most likely outcome.”
Here’s a link to the full minutes. The next FOMC meeting is December 13/14.
Congress returns
This week the Congress returns for a lame duck session which will be the last opportunity for Democrats to pass pieces of their agenda prior to Republicans taking control of the House in January.
The highest priority for the Congress will be to pass a budget to fund the federal government before the current Continuing Resolution (CR) expires on December 16. The preference of Democrats and some Republicans is to pass an Omnibus Spending Bill that covers the entire Federal budget through the end of the current fiscal year that runs until October 1, 2023. The problem with another CR is that the government runs on spending levels and priorities established in last year’s budget. In areas such as defense, priorities are evolving, led by the war in Ukraine, and supporters of the DoD would like to see an FY 2023 budget that reflects changing priorities.
Any agreement to pass an Omnibus Spending Bill will require the acquiescence of Senate Republicans as the budget is subject to a filibuster and hence requires a 60 vote majority. With the evenly split Senate this means that funding the full fiscal year will require the support of at least 10 Republicans. An important development to watch will be whether or not the House Republicans push their Senate colleagues to fight a full year’s spending bill in order to give the new House Republicans majority input into the spending priorities for the current fiscal year. If Congress goes this route, a new CR will likely run until February or March creating a new government shutdown deadline in the first quarter of next year.
The current CR deadline of December 16 means that a week before Christmas the US Government could face a partial government shutdown if no agreement is reached. The bipartisan leadership of both the House and Senate have publicly stated that they don’t want to see a government shutdown. However, the Republicans in the House enter the new year with only a five seat majority, and at this point in time Leader Kevin McCarthy doesn’t have the 218 votes he will need to be elected Speaker. When the Republican Conference met prior to the Thanksgiving break to vote on their candidate for Speaker, McCarthy won on a vote of 188 to 31, enough to win the vote in the conference but not enough to get him across the finish line on January 3, 2023 when the full House will vote on the next Speaker.
The rule for election of the Speaker is the winning candidate must get a majority of Members present and voting. If all Members are present the magic number is 218. This is well below the number McCarthy got in the Conference vote making for a tough few weeks of intra-party negotiations.
One tool McCarthy could use is to ask dissenting Members to miss the vote or vote “present.” Two years ago in 2021 Nancy Pelosi was elected speaker with only 216 votes as several Democrats were absent due to a winter storm in the Northeast. However, McCarthy’s challenge seems more serious as the right wing Tea Party Members have their own agenda that may not coincide with McCarthy and other Republicans. They may demand votes that could put a handful of moderate Republicans in a tough position. The Republican narrow majority was accomplished in large part with seats flipping in New York and California. If Republicans from these more moderate districts want to win again in 2024 they might find it difficult to agree with the most conservative members of the House Republican Caucus.
Another challenge McCarthy will have in governing with his five seat majority is the split within the Republican Party between those who support former President Trump and others. The former President likes being in the spotlight of public policy and there is a possibility he could urge his supporters to take a position that is different than the Congressional Republican leadership. President Trump has already called for the “impeachment” of Senate Republican Leader Mitch McConnell for supporting an increase in the debt ceiling. The early entry of the former President into the 2024 nomination process likely increases the role he could play in close House votes.
On issues ranging from the debt ceiling to funding the war in Ukraine Republicans may have to find agreement with Democrats in order to overcome opposition from the most far right members of the House Republican Caucus.
The bottom line is that the narrow incoming Republican majority, and the push they face from the far right will place a premium on finding issues that can pass in the next few weeks before the new Congress is sworn in at noon on January 3.
FTX hearing
On Thursday the Senate Agriculture Committee will hold a hearing on the failure of FTX. The Senate Ag Committee has jurisdiction over the Commodities Futures Trading Commission (CFTC) and the only witness will be the CFTC Chair Rostin Behnam.
Why Ag? In the politics of DC regulation some want the crypto world regulated by the CFTC and others want the SEC to have principal jurisdiction; this is an opening shot in that battle. Here is a link to the Committee’s hearing notice.