This coming week there will be two big events in Washington that could impact markets – Powell’s testimony and Biden’s FY 2024 budget. Undoubtedly the most important for investors is the semi-annual Congressional testimony by Fed Chair Jay Powell. Since the Fed’s current fight against inflation first began Chair Powell at his post-meeting press conferences and in other speeches has emphasized how rate decisions will be data driven. As the Chair appears before Congress this week the emphasis on data is likely to be a key theme of his testimony.
Powell will appear before the Senate Banking Committee Tuesday morning 3/7 and the House Financial Services Committee Wednesday 3/8. I have given the Chair an A for telegraphing policy and not surprising markets; Congressional testimony is another opportunity to prepare markets for the next Federal Open Markets Committee (FOMC) meeting March 21/22.
The testimony is likely to create headlines as progressive Democrats push back on the current course of action the Fed is taking by raising rates. Senators such as Elizabeth Warren may well express the view that rate increases hurt the poor and have the potential to stop the strong employment increases the US has enjoyed in recent years.
Ironically Chair Powell is more likely to see support from Republicans who campaigned on the charge that the Biden Administration had failed to address inflation in last year’s elections. In fact some Republicans on the House and Senate Committees may well take up the call of former Treasury Secretary Lawrence Summers that the central bank should be raising rates faster and push Chair Powell on why the Fed doesn’t increase rates 50bps at the March meeting.
During my Congressional staff career I prepared House and Senate Members for hearings and I know these session are more an opportunity for face time on television for the Representatives and Senators than a true search for the truth. Many of the Members want to press the Chair in the hope that their question will be the one that makes the evening news.
Powell knows that there is more significant data to come out before the next meeting including the CPI and jobs numbers for February. While most signals to date have pointed towards a 25bps move at the March meetings the hearings give Chair Powell the opportunity to continue to send a consistent signal as the March meeting approaches.
Budget
The other big event this week is the release on Thursday of President Biden’s budget for Fiscal Year 2024. The day of the release Biden will speak in Philadelphia and the next day Treasury Secretary Yellen will discuss the budget in front of the House Ways and Means Committee.
The release of the President’s budget is always a big deal in DC as it spells out the Administration’s priorities; this year it takes on added importance as President Biden is preparing to announce his re-election plans and the White House needs to deal with the Republican controlled House on the debt ceiling.
As House Republicans work to formulate a strategy for dealing with increasing the debt ceiling, reducing federal spending seems central to the Republican plans. President Biden and Speaker McCarthy have met once on the need to find a roadmap to raise the ceiling, but there haven’t been any follow up meetings. The official publication of the President’s budget lays the ground work for further talks as it will put pressure on Republicans to unveil their budget proposals. While the Administration has said they want a “clean” debt ceiling increase, a divided Congress makes that unlikely.
The politics of increasing the debt ceiling is always a challenge, especially for House Republicans. Unlike the Senate where Senators only have to run every six years, House Members know they run the risk of a primary challenge every other year. Many Republicans know that a vote to increase the debt ceiling, no matter how grand the bargain, gives any Republican primary opponent the issue of charging the incumbent Member being a big spender. Yet the Democrats can’t pass a debt ceiling bill without some Republican support as they do hold the majority.
Further complicating the debt ceiling vote this year is the box McCarthy put himself in when he sought the votes to win the Speaker’s position. Usually the Speaker leads the way when leadership is required on a tough vote, but how the Speaker will vote on such a tough issue is very much in doubt. Republican House leaders must develop a strategy that allows for a dozen or so Republicans to vote with Democrats to increase or suspend the debt ceiling without their Republican colleagues looking for their scalps.
The non-partisan Congressional Budget Office has reported that they believe the ceiling “drop dead” date is likely early July; but April incoming tax revenues can impact the date in either direction. Increasing the debt ceiling is likely to be the dominate issue for Congress in the next few months.
Counting Senate votes
Senate Majority Leader Chuck Schumer has a headcount issue this week with two of his Democratic Senators in the hospital. Pennsylvania Senator Fetterman is out for an indefinite time, receiving treatment for depression, and 89 year old California Senator Dianne Feinstein is in the hospital suffering from shingles. With these two Democrats out, there are only 49 Democrats available for any vote, hence VP Harris may well be a busy person as the Senate will stand at 49/49 for the next few weeks.