CPI, Supplemental Move Sideways

Update 756 — Week of Holding Patterns:

CPI, Emergency Supplementals, Budget

The January CPI report out this week showed prices barely budged from December, disappointing investors and others who had hoped to see the Fed start to ease interest rates this quarter. The Senate passed a $95 billion supplemental package on Tuesday that excluded border security provisions. That omission made it a dead letter in the House, though a bipartisan coalition of House members late yesterday introduced a scaled-back $66 billion package with problematic border provisions and uncertain prospects.

The stasis on the surface and the Congressional recess schedule mean that we are once again nearing the expiration of the FY24 budget agreement keeping the government funded, only two weeks out from a partial shutdown. A week of hibernation and quiet negotiations may yet yield a long-awaited spring to action. Details of these and other developments below. 

Good weekends all…




Inflation Cooling, But Less Than Expected in January 

Inflation cooled, but by less than observers expected in January, as shelter costs kept inflation above three percent. Tuesday morning’s Consumer Price Index (CPI) data showed that headline inflation rose by 0.3 percent in January, just as it had in December. Headline CPI rose by 3.1 percent over the past 12 months, down from a 3.4 percent annualized increase in December. Core CPI – which excludes volatile food and energy prices – rose by 0.4 percent over the month and by 3.9 percent over the past twelve months, remaining flat after the annualized increase of 3.9 percent in December. 

Source: Council of Economic Advisors

Shelter costs, comprising roughly one third of the CPI weighting, contributed over two thirds of the January increase in headline CPI. Shelter costs rose by 0.6 percent monthly and by six percent on an annualized basis. 

Food costs also rose by 0.4 percent in January, with the food-at-home index rising by 0.4 percent, while food-away-from-home rose 0.5 percent. Meanwhile, energy prices fell by 0.9 percent mainly due to a decline in the gasoline index which fell by a substantial 3.3 percent. Prices of motor vehicle insurance and medical care costs rose over the month while prices of used cars and trucks and apparel fell. 

Fed Chair Jerome Powell has said that the Federal Reserve would like to see inflation hold nearer the Fed’s two percent target over twelve months before beginning to cut interest rates from its current level of 5.25 to 5.5 percent. The slightly hotter than expected inflation data on its own is unlikely to break from its seven-month pause and impel the Fed to cut rates at the next Federal Open Market Committee (FOMC) meeting in March or even at the Committee’s meeting in May. 

Other Developments

Senate Passes, House Raises Competing Supplemental 

In the early hours of Tuesday morning, the Senate concluded a series of votes to pass the National Security Supplemental with a final tally of 70-29. The $95 billion package contains funding for Ukraine, Israel, the Indo-Pacific and humanitarian assistance to conflict zones around the world. Last week, this bill failed when it included bi-partisan negotiated border provisions after former President Donald Trump urged Senate Republicans to reject any border concessions, maintaining immigration as a central campaign issue.

While Speaker of the House Mike Johnson (R-LA) will almost certainly refrain from bringing the Senate bill to a House vote himself, a bipartisan group of lawmakers in the House responded by releasing their own national security and border proposal Thursday evening. The $66 billion proposal, titled “Defending Borders, Defending Democracies,” is pared down, encompassing only defense-related spending and a set of controversial border and immigration provisions, excluding humanitarian assistance featured in the Senate bill.

Prospects are dim to nil for the Senate bill in the House. In the hours before the final votes in the Senate, Speaker Johnson (R-LA) released a statement criticizing the absence of border provisions and denouncing what he referred to as “insufficient border provisions.” Meanwhile, House Democratic leadership is exploring an option to side-step Speaker Johnson’s intransigence via a rarely-used procedure known as a discharge petition requiring 218 votes to circumvent the Rules Committee. In this scenario, the minority party can attempt to gather enough support to bring the bill to the floor if the Speaker refuses to do so. 

As the House follows the Senate into a President’s Day recess, American allies will be left without long-awaited funding and American stockpiles will continue to stand by for the $20 billion earmarked for replenishing the domestic supply of defense systems in the Senate-passed bill. 

FY24 Negotiations Continue 

House and Senate appropriators are working toward an agreement on the specifics of the 12 funding bills for fiscal year 2024 that will need to be passed in early March to avoid a partial or full government shutdown. Key negotiators like House Appropriations Committee Ranking Member Rosa DeLauro (D-CT) remain confident that they will be able to iron out differences and pass funding bills before their respective deadlines:

March 1

  • Agriculture
  • Energy and Water
  • Military Construction and Veterans Affairs
  • Transportation, Housing, and Urban Development (T-HUD)

March 8 

  • Commerce, Justice, and Science (CJS)
  • Defense
  • Financial Services and General Government (FSGG)
  • Homeland Security
  • Interior and the Environment
  • Labor, Health and Human Services, and Education (Labor-HHS)
  • Legislative Branch
  • State and Foreign Operations

A main obstruction to concluding the appropriations process is the Republican push for extreme policy riders, often referred to as “poison pills,” that Democrats adamantly oppose. The fight over policy riders is likely to be decided by Congressional leadership and the Biden Administration, who will be forced to come to terms with conflicting non-negotiable riders from both parties. 

Though leaders remain optimistic that Congress will resolve differences on funding priorities to avoid a government shutdown, the final FY24 bills could be in danger on the House floor. Speaker Johnson might be forced to bring up funding legislation under suspension of the rules (requiring a two-thirds majority vote) and again rely on Democrats to overcome opposition from within his own party, which has had difficulties remaining united under a razor-thin majority. 

Both the House and Senate will be out of session next week, leaving a precious few days at the end of the month to move the FY24 budget legislation when they return.

OCC Releases Stress Test Scenarios for 2024

Yesterday, the Office of the Comptroller of Currency (OCC) released the economic and financial market scenarios to be used in the upcoming company-run stress tests for covered institutions, including certain national banks and federal savings associations. These will include baseline and severely adverse scenarios. 

Annual stress tests are intended to help ensure that financial institutions have sufficient capital to continue operations throughout times of economic and financial stress.

Specified financial institutions are required to submit the results of stress tests to the OCC by April 5 and publish those results between June 15 and July 15.


HFSC on Fed Discount Window and Emergency Lending

The House Committee on Financial Services Subcommittee on Financial Institutions and Monetary Policy convened on Thursday morning for a hearing titled “Lender of Last Resort: Issues with the Fed Discount Window and Emergency Lending.”

The Federal Reserve’s discount window allows solvent financial institutions to borrow against their collateral to manage short-term liquidity challenges in times of stress. This can help to bolster the resilience of the broader financial system. The Fed’s discount window functions as the primary mechanism for lender of last resort (LLR) lending but commercial banks currently face stigma if they make use of the facility and may face negative reactions from their depositors and investors as a result. 

The hearing discussed the stigma associated with the use of the Federal Reserve’s discount window. Under the Dodd-Frank Act, borrowing through the discount window must be disclosed by the Fed within two years. Professor Simon Johnson stated that a return to a system of secret borrowing could be problematic. 

Professor Johnson recommended better preparing all depository banks to access Fed emergency lending under unexpected circumstances, potentially by making sure that private sector information technology systems are set up so as to interface effectively and immediately with official systems to increase efficiency. 

Expert witnesses also discussed the Bank Term Lending Program (BTLP) established following the collapses of Silicon Valley Bank and Signature Bank last March. The emergency lending facility will remain open until March of this year.