Senate Foreign Assistance, CBO on Debt, Bank Junk

Update 754 — Econ. Policy Weekly Roundup:
Foreign Assistance, CBO on Debt, Bank Junk

None of the disparate panoply of major developments this week points clearly to the resolution of long-festering issues, but each deserves attention. The Senate is coming to grips with a bill providing “emergency” supplemental foreign assistance requests originally submitted by the President in October. But would the House ever take it up?

This week, the CBO issued a report on long-term U.S. debt. But is a much-discussed fiscal commission – likely to be established by Congress with the GOP balking at revenues – an effective means to address it likely to be adopted? One of the country’s largest regional banks plagued by commercial real estate exposure saw its credit rating cut to junk. But the implications for the sector are murky. We shed light on these and other developments below.

Good weekends, all….




Senate Advances Foreign Assistance Bill Sans Border 

On Thursday, the Senate voted 67-32 to advance a $95 billion foreign aid package absent of border provisions that includes: 

  • $60 billion for Ukraine, 
  • $14 billion for Israel,
  • $9 billion for humanitarian assistance in Gaza, West Bank and Ukraine, and
  • $4 billion for the Indo-Pacific. 

The cloture vote passed with support from Senate Republican Leader Mitch McConnell (R-KY) and Minority Whip John Thune (R-SD) along with fifteen other Senate Republicans, who are feeling the pressure to move vital assistance for American allies around the world. 

This vote came after a long week of Congressional drama sparked by the release of a long-awaited border security package negotiated by Senators James Lankford (R-OK), Chris Murphy (D-CT), and Kyrsten Sinema (I-AZ). The team of Senators negotiated with the hopes of unlocking GOP support to pass funding for Ukraine, Israel, and the Indo-Pacific. However, House Speaker Mike Johnson (R-LA) deemed the package inadequate and responded by putting forward standalone Israel funding, which ultimately failed in a 250-180 vote. 

The Senate resolved drama of its own before ultimately deciding to exclude border provisions from foreign aid. Amidst Republican disapproval of the compromise, Wednesday’s cloture vote failed 49-50 on the $118 billion National Security Supplemental, which included the newly released border provisions. Months of bipartisan negotiation and GOP pressure to pair any foreign aid with immigration provisions quickly fell apart after former President Trump expressed his disapproval of any border policy compromises, likely to maintain immigration as a central issue in his 2024 presidential campaign. 

Next, Senators are poised to vote to amend the vehicle with legislative text this evening at 7 p.m. Expected to pass easily with a simple majority, Senate Republicans are then expected to stall the proceedings, which may last into early next week with the intention to bring their own amendments to the bill. 

If the bill does manage to pass in the Senate, House Minority Leader Jeffries (D-NY) announced he was inclined to “use every available legislative tool” to get the bill on the floor if Speaker Johnson refuses, a hint towards the possible use of a discharge petition which would require a majority of House members support. 

While American allies await Congressional action to secure funding, the European Union announced 50 billion euros in support for Ukraine last week.

Other Developments 

CBO Releases 10-year Budget, Econ. Projections 

On Wednesday, the Congressional Budget Office (CBO) released its yearly 10-year Budget and Economic Outlook, which serves as a baseline for Congress to analyze the impact of future legislation. 

On the economic front, the CBO projects that growth, as measured by real GDP, will begin to fall beneath two percent in 2024, following a strong last year. Unemployment is expected to rise while inflation continues to trend down towards the Fed’s two percent goal, likely motivating the Fed to lower interest rates. Growth, measured by real GDP, is expected to pick up pace in 2025 and level out to an average of 2.2 percent in the following years. The CBO also forecasts that the surge in immigration seen in 2022 will continue, motivating a larger workforce capable of generating higher-than-expected economic output. However, CBO director Phillip Swagel acknowledged that they are still analyzing the possible effects of border policies currently being pushed by Republicans in Congress on this trend. Legislation could change estimates for immigration when the CBO revises their estimates later this year. 

On the positive side, the CBO adjusted its May 2023 projections for the cumulative deficit between 2024 and 2033 by seven percent, now estimating that the deficit will total $2.6 trillion in 2034. A main factor contributing to the adjustment was the Fiscal Responsibility Act (FRA) negotiated last year by former House Speaker Kevin McCarthy and President Biden. This, combined with lower funding levels enacted through continuing resolutions used to extend appropriations funding deadlines from last fall, will decrease federal discretionary outlays by $2.3 trillion over the next 10 years. However, some of this decrease is expected to be offset by: 

  • Increased costs for servicing the national debt, which the CBO projects will reach 116 percent of GDP by the end of 2024 and 172 percent by 2054. Interest payments on the national debt are likely to surpass all other categories of government spending, totaling 12.4 trillion over the next decade.
  • Rising healthcare expenditures are partially due to increasing life expectancy. 

Despite this positive development, the U.S. national debt is still expected to surpass historic highs later this decade, topping out at 116 percent of GDP in 2034. For perspective, the debt-to-GDP ratio only reached 113 percent by the end of World War II. Fears about the state of our fiscal future were highlighted by Fed Chair Jerome Powell last weekend in his appearance on 60 Minutes, and it seems we are still on an unsustainable fiscal path. 

It is important to take the marginal improvement in the CBO’s baseline budgetary projections with a grain of salt. Because the CBO’s projections for revenue growth were made with the assumption that major Tax Cuts and Jobs Act (TCJA) provisions will expire as scheduled at the end of 2025, an extension of the costly Trump-era tax policy could contribute upwards of $4 trillion to the national debt over the longer-term. TCJA provisions are likely to bring on an intense fight next year, the results of which will depend greatly on the 2024 election. Democrats will need to secure as many wins as possible this year to ensure that revenues can remain at sufficient levels to address the growing national debt/deficit while protecting access to crucial social programs. 

Fiscal Commission Face Opposition from Conservatives 

Legislation for a fiscal commission was passed out of the House Budget Committee three weeks ago but has since stalled. Though calls for a fiscal commission are expected to continue when the House Budget Committee convenes for a hearing next week to review the results of the CBO Budget and Economic Outlook, conservative groups have now begun to suggest that the effort is a stalking horse for tax increases. 

A letter, led by Grover Norquist from Americans for Tax Fairness, was sent to members of Congress on Thursday, arguing that spending is unilaterally contributing to the growing national debt and deficit. The effort to create a commission gets some bipartisan support, though, due to the commitment to consider every possible solution, even revenue that could be generated through tax increase. This new source of opposition further clouds the uncertain possibility of a fiscal commission, which many Democrats feel would lead to harmful cuts in entitlement benefits. 

NYCB Faces Stress but Yellen Downplays Broader Systemic Implications

On Wednesday, Moody’s Investors Service downgraded New York Community Bank’s (NYCB) credit rating by two notches to junk. The bank’s share price also fell to a 27-year low this week after the bank released its earnings report for the fourth quarter of 2023 last Wednesday, which showed a $252 million loss and that it set aside $552 million – far more than investors had expected – in loan-loss reserves. 

As of December 31, 2023, the Long Island based NYCB was the twenty eighth largest bank in the nation with over $111 billion in consolidated assets. The regional bank currently operates over 400 branches. Last year, NYCB acquired roughly $13 billion in mainly commercial and industrial loans and $34 billion in deposits held by Signature Bank before its collapse. That purchase came not long after the bank agreed to purchase Flagstar Bank. These purchases pushed the NYCB over the $100 billion asset threshold, making it subject to additional regulation, including stronger capital requirements. Additionally, NYCB bolstered its ability to withstand losses in its commercial real estate portfolio as demand for office spaces has fallen. 

In testimony before Congress this week, Treasury Secretary Yellen declined to specifically comment on stress faced by NYCB when the issue was raised by Congressman Richie Torres (D-NY). Before the Senate Banking Committee yesterday, Yellen noted that FSOC had discussed risks posed by weak demand in the commercial real estate market in the current high interest rate environment at all of its meetings this year. She further noted that “there’s going to be stress and losses that are associated with this.” Banks hold about $1.4 trillion in commercial real estate loans that are set to mature over the next five years. The KBW Regional Banking Index has fallen by over 11 percent so far this year. Secretary Yellen emphasized that with exposure to commercial real estate by the largest banks remaining low, she believes that there “will not end up being a systemic risk to the banking system.”


Yellen Delivers FSOC Annual Report to Congress 

On Tuesday and Thursday, Chair of the Financial Stability Oversight Council (FSOC) Treasury Secretary Janet Yellen testified before the House Financial Services Committee (HFSC) and the Senate Committee on Banking, Housing, and Urban Affairs to deliver FSOC’s 2023 annual report. 

In addition to commercial real estate risk (see above), Secretary Yellen also discussed a broad range of topics including: 

  • federal bank regulators’ Basel III Endgame proposal
  • FSOC’s framework to designate nonbank financial companies as systemically important
  • risks to the financial sector posed by commercial real estate risk
  • climate-related financial stability risks
  • Artificial intelligence 
  • digital assets

House Financial Services Chair Patrick McHenry (R-NC) and Representative Ann Wagner (R-MO) targeted the FSOC’s recently finalized systemically important financial institution (SIFI) framework in his questions to Yellen, who stressed that such designation is not the FSOC’s preferred tool to protect financial stability. HFSC Ranking Member Maxine Waters (D-CA) applauded FSOC for updating its designation procedures to ensure the Council can use all tools at its disposal to protect the stability of the broader financial system. 

Republicans used the hearings to raise familiar objections to the Fed, FDIC, and OCC’s joint proposal to implement the final components of the Basel III agreement, also known as the Basel III Endgame, which includes a new set of capital requirements for the largest financial institutions. Secretary Yellen declined to comment on the specifics of the proposal but noted that stronger capital and liquidity serve to reduce risk across the banking sector. 

Look Ahead

Tuesday, February 13

  • January Consumer Price Index (CPI) report

Wednesday, February 14

Thursday, February 15