Tuesday the President goes to the Capitol to make his first in-person State of the Union (SOTU) address. It comes with some wind to the President’s back with the powerful half-million jobs gain in January, but questions emerge surrounding the Chinese spy balloon.
Congress loves to applaud successes of the US military, and while there was criticism of the timing of the President’s action to take down the balloon, there will be loud approval of the successful mission to take it down. As a former political speech writer it is a tried and true approach to start with an applause line and the balloon takedown along with the strong jobs report will serve as a good opening to a tough audience with Republicans now in control of the House. It is always a powerful visual of our democracy when the President of one party is introduced by the House Speaker of the opposite party.
One issue that Speaker McCarthy will have to control is the reaction of his most rowdy and conservative members. Being disrespectful to the President is never a good impression at this annual speech with a national audience.
What issues will the President address?
The SOTU gives President Biden a unique opportunity to use the “Bully Pulpit” of the Presidency to take credit for his accomplishments and outline his agenda for the coming year. The President will talk about the bipartisan passage of both the CHIPS Act and Infrastructure legislation and the jobs these bills will create. He is also likely to address the killing of Tyre Nichols in Memphis and the need for policing reform. The President is likely to give a strong pitch for more aid to Ukraine in light of growing skepticism among parts of the Republican Party.
However, the big issue for the President and Congress is coming up with a strategy to raise the debt ceiling. Treasury Secretary Yellen has informed Congress that while the ceiling has technically been hit, the government has tools to avoid a default that can carry funding through the spring.
Last week President Biden and Speaker McCarthy had their first face to face meeting since Republicans captured control of the House. Few Presidents have the legislative experience that President Biden brings to the job and I think this was reflected in the well-orchestrated meeting between these two key actors in the debt ceiling debate. Both sides left the door open for more talks, McCarthy has taken cuts in Social Security and Medicate off the table, and the President recognizes there may be some areas where cuts can be found.
The last time Congress increased the debt ceiling in December of 2021 the rise amounted to $2.5T; while there may be hundreds of billions of cuts that might be possible to find, trillions of dollars is mission impossible especially when both sides have taken social security and Medicare off the table and defense and veterans cuts are unlikely to be part of any deal.
The GAO has estimated that there are over $150B in unspent covid emergency funds from the American Rescue Plan and Republicans have targeted the $80B Democrats have approved to beef up enforcement by the IRS. But having dealt with budget cutting exercises before, finding the ever popular waste and fraud is easier said than done.
The President is likely to call for a “clean” debt ceiling increase which will likely be opposed by the Republicans and Republicans will demand cuts with a goal of bringing overall spending back to levels in the FY 22 budget. Both strategies are non-starters requiring Biden and McCarthy to find an exit strategy in the coming months.
Fed
Last week the Fed, as widely expected, increased rates by 25bps. It once again demonstrates that under Chair Powell the Fed is going to telegraph policy and not surprise markets. Both the statement and the Chair’s press conference combined hawkish statements on pushing towards the 2% inflation goal but also mentioned the need to be data driven in future policy decisions.
Here’s a link to the official statement of the FOMC
As Tom Lee pointed out in his note after the meeting, Chair Powell used the word “disinflation” 13 times in his post-meeting presser. In my view the Chair’s focus on data driven decisions gives the Fed an exit ramp if the Committee decides to pause rates to see what the impact is of the increases they have already put in place.
The next FOMC meeting isn’t until March 20-21 and this will allow the Fed to look at the key reports for both January and February. There will be a great deal of “Fed speak” between now and the next meeting and I expect the Chair and his team to maintain their policy of alerting markets as their thinking evolves and new data comes in.