Fed Rates, Crypto on Front Burner

Update 706 — Hotter Than July:
Fed Rates, Crypto on Front Burner

After a July 4th break following a long and tumultuous session, the House and Senate will reconvene next week to resume work on policy agendas covering a wide range of economic issues over the course of July. Timelines remain fluid, but we expect a busy month in Washington nonetheless. 

None of the must pass pieces of legislation facing Congress this year — FAA and farm bill reauthorizations, the budget — are expected to come up for floor votes this month. But we anticipate action both on and off the Hill — starting with the Fed’s FOMC meeting next week to set interest rates and a markup of crypto legislation slated for the third week of July. Below, we discuss what to expect in the coming month and identify items that may see action over the course of the next four weeks. 

Good weekends all,


Topline News: 

  • Diverging Jobs Reports

Yesterday, ADP reported a blowout private sector jobs report: 497,000 jobs added, more than twice the 240,000 expected. Then, today’s nonfarm payroll report showed a gain of 209,000 jobs, fewer than the 220,000 expected. In addition, April and May’s payroll numbers were revised downward by 110,000 jobs. Despite these softer numbers, the unemployment rate declined from 3.7 percent to 3.6 percent. Since the pandemic began, divergences between ADP and the Department of Labor’s numbers have not been uncommon, with the Labor numbers usually seen as more accurate and more cited. 

  • Bidenomics Booms in South Carolina

President Biden touted the success of his economic agenda, “Bidenomics,” in a speech in South Carolina on Thursday. During the appearance at a manufacturing facility, the president emphasized his administration’s commitment to bolstering American manufacturing and infrastructure, citing the bipartisan CHIPS and Science Act and Infrastructure Investment and Jobs Act. Biden has made revitalizing the country’s infrastructure – and by extension creating good jobs in the construction industry – a core part of his platform. He emphasized that, as a president for all Americans, he was focused on federal funding for projects in areas that needed it, even if they are in districts whose members did not vote for his programs.

The President kicked off his Investing in America tour in March to promote his economic vision for the country and will continue to travel the country in the coming weeks.

Items to Watch for in July:

  • FOMC Meets to Set Rates Next Week

The minutes from the FOMC meeting in June affirm Chairman Powell’s statements during his testimony before Congress two weeks ago: the Federal Reserve has not concluded its series of interest rate hikes. Despite a unanimous decision to pause, the discussions held during the meeting were marked by intense debate. The Committee’s rationale was that, considering the cumulative impact of 10 consecutive hikes, the appropriate rate of increase in the discount rate would likely be slightly below 25 basis points per month. This gave rise to an expectation of an imminent rate hike, and it appears likely that another hike will occur in July.

Today’s payroll report is consistent with the idea of a declining need for increased interest rates, as employment gains are slowing, but still strong. Compared to the numbers the labor market was putting up month after month when the Fed felt it was necessary to hike by 75 bp per month, the labor market appears to have cooled. 

The Institute for Supply Management’s manufacturing survey indicated an eighth consecutive month of declines in June and mortgage rates have risen and applications have decreased. But note, these data points are renowned for their volatility, so the Fed will likely proceed with another rate hike in July.

  • Digital Assets Demanding Attention

Chairman of the House Financial Services Committee Patrick McHenry (R-NC) has repeatedly expressed his desire to rein in the digital asset industry, and July just might be the month he accomplishes that – or at least makes his greatest effort thus far. 

Last month, the House Republican penned two bills on digital assets – a crypto market structure discussion draft and a bill to regulate stablecoins. Though neither item received a warm welcome from HFSC Democrats, who remain extremely skeptical of the volatile technology, McHenry has proven adamant on bringing these bills to a markup and making them a priority for the House Financial Services Committee. 

  1. Crypto Market Structure Bill 

On June 2, Rep. McHenry and House Agriculture Committee Chair Glenn Thompson (R-PA) released a discussion draft of legislation with the intention to provide a statutory framework for digital assets. The duo said the bill was meant to provide clarity, fill regulatory gaps, and foster innovation – all while providing adequate consumer protections. The legislation was met with harsh Democratic opposition; Ranking Member Maxine Waters (D-CA) described it as an attempt to rewrite our existing securities and commodities laws and overhaul our nation’s capital markets. To say Democrats are skeptical would be an understatement.

The draft discussion is currently scheduled for a markup in both the House Agriculture and Financial Services Committees on July 13 and 19, respectively. We expect a large majority of Democrats to oppose the bill, especially if no additional accommodations are made to them in the coming weeks. 

  1. Stablecoin Bill 

What is often seen as the lowest hanging fruit in regard to digital asset regulation, stablecoins are also likely to be at the forefront of discussion for the Committee. After a brief stint where the House GOP released what they claimed to be a bipartisan bill (it wasn’t), Waters recently stated that she is encouraged by the legislative progress made thus far, and expressed her desire to return to the negotiating table with Chair McHenry. 

Namely, Waters will be working to reconcile some of the major red flags in the original Republican bill, including but not limited to the bill’s lack of consumer protections and insufficient oversight of state chartered stablecoin issuers. Though the ranking member seems optimistic on bipartisan progress, her colleagues will undoubtedly need more convincing in the coming weeks if anything is to be finalized. 

  • July 27 Deadline for FSOC Guidance Comments

Comments are due to the Financial Stability Oversight Council (FSOC) on their nonbank designation for Federal Reserve supervision by July 27. Unlike the Trump administration’s 2019 guidance, it allows FSOC to designate a nonbank financial firm for Federal Reserve supervision based on the vulnerability of the financial system, rather than the specific activity the actor is engaged in. As almost every financial crisis of note in the last two and a half centuries has been caused by financial innovation that regulators did not have the authority to regulate until it was too late, it is vital that the proposal suggested in April pass.

Contenders for July Action

  • House, Senate Appropriators Still At Odds

The House and Senate Appropriations Committees remain at odds over funding levels, setting the stage for a showdown between the two chambers later this year. House Republicans are treating the recent debt limit deal as a ceiling and marking up their bills to Fiscal Year 2022 levels, while the Senate has been treating the deal as a floor and marking up to Fiscal Year 2023 levels. These disparities will need to be resolved before Congress can pass an omnibus this year.

The House has now marked up six of its twelve spending bills and passed two additional bills out of their relevant subcommittees. But the remaining bills will be the most difficult for the full committee to approve given the split between the GOP’s mainstream and hard right members. Passing them on the House floor will be an even bigger challenge for leadership – House GOP leaders are reportedly considering pursuing a stopgap spending bill as early as this month to circumvent a government shutdown if Congress doesn’t have all twelve appropriations bills passed by October 1. Some Republicans believe that passing this stopgap bill would put Republicans in a better bargaining position by taking a shutdown off the table.

The Senate Appropriations Committee has marked up only two bills at the full committee level thus far, but Chairwoman Patty Murray (D-WA) and Ranking Member Susan Collins (R-ME) are hoping to get their twelve bills done before August recess, on a far more bipartisan basis than the House. The committee will reconvene next week to markup the Legislative Branch; Commerce, Justice, Science, and Related Agencies; and Financial Services and General Government Appropriations bills.

  • House Poised to Push Tax Package

In mid-June, House Ways and Means Republicans approved a package of tax bills without a single Democratic vote. The package, which Republicans have named the Tax Cuts for Working Families Act, contains a number of tax cuts for corporations and the wealthiest Americans costing billions of dollars. If all of the provisions in the bill were made permanent, they would cost $1.1 trillion over ten years.

While nothing concrete has been announced, Republicans could bring the package to the floor as early as this month. If passed, the bill will be dead on arrival in the Democratically-controlled Senate.

  • RECOUP to the Floor?

On June 15th, members of the Senate Banking Committee banded together in a rare bipartisan manner to introduce the RECOUP Act (the Recovering Executive Compensation from Unaccountable Practices). The bill, introduced by Sens. Brown (D-OH) and Scott (R-SC), recently breezed through a markup in the Senate Banking Committee – the first markup the committee has held in four years. The bill passed with a 21-2 vote, indicating momentous support for the Federal Deposit Insurance Corp. (FDIC) to strip bonuses and stock compensation that executives took in the two years before a bank’s failure and impose on them a fine of up to $3 million. 

Although no date has been formally announced as to when RECOUP will be brought to a floor vote, the Senate seems eager to address the matter sooner rather than later – ideally before August recess. After that point, it is widely expected appropriations will consume the time and attention of Congress, limiting the ability to pass a particularly significant and undeniably important bill. 

A Look Ahead 

Both the House and Senate will return to business as usual next week. Despite a packed agenda, all eyes will be on the central bank as they announce their decision on interest rate hikes. The decision will be reported on Wednesday afternoon.