Update 723 — Fed Pauses, House Punts: Econ. Policy in Week of Moving Sideways

The Fed held interest rates steady this week, with chair Jerome Powell suggesting that rates are likely to remain higher for longer than previously expected, raising recession worries. Meanwhile, on the Hill, House Speaker McCarthy sent members home for the weekend without moving any closer this week to a resolution of the months-long effort to avoid a government shutdown, with a week to go before the current federal budget expires.

The UAW strike too saw no resolution in its first week, and the union today announced an expansion of the strike to GM and Stellantis parts and distribution centers across 20 states. The House Financial Services Committee approved a key bill, but one that would block the issuance of a central bank digital currency. Stasis under pressure characterized a week of moving sideways, with the inability of Congress to agree on almost anything coming into clearer view. Details below.

Good weekends, all…

Best,

Dana

Headline Developments

The Fed Hits Pause on Interest Rates 

On Wednesday, the Federal Reserve announced that it will hold interest rates steady in the 5.25 to 5.5 percent range following the Federal Open Market Committee (FOMC)’s September meeting. The Fed’s decision to pause comes at a critical point in the Fed’s cycle of rate hikes, after raising rates from near zero in early 2022 to the highest level in 22 years. The Fed has raised the federal funds rate eleven times since the beginning of its rate hiking cycle and must now, at this point, decide whether and how much higher to push rates up and how long it will hold them at such elevated levels. 

The Fed must proceed carefully as it assesses the extent to which it will implement additional policy firming, as overcorrecting could disrupt the continued strength of the labor market and tip the economy into a recession that they have so-far avoided. 

This week’s hike comes as core inflation continues its downward trend. Last month, core CPI, which excludes volatile food and energy prices, rose by 4.3 percent over the previous year, the smallest year-on-year increase since October 2021. Meanwhile, the labor market has remained resilient, with an average of 150,000 jobs being added to the economy each month over the past three months and unemployment remaining relatively low at 3.8 percent. 

The Fed also released economic projections submitted by members of the FOMC in conjunction with the meeting, which suggested that another 25 basis point hike may be coming over the two remaining FOMC meetings this year, which will be held on October 31 and November 1 and on December 12 and 13 respectively. The projections also suggest that the Fed expects fewer rate cuts next year than it did in June. In his press conference Wednesday afternoon, Fed Chair Jerome Powell said that rates may stay higher for longer than previously expected and that the Committee would take a data-dependent approach moving forward.

Markets reacted to the decision with 10-year U.S. Treasury yields surging to their highest level since November 2007 and the 2-year Treasury yield hitting its highest point since July 2006 following the announcement of the decision and Powell’s accompanying remarks on Wednesday. 

Yield on 10-Year U.S. Treasury Notes (Jan 2023-Present)

Source: Wall Street Journal

With the Fed’s ongoing series of rate hikes almost certainly approaching its end, the question is now how long the Fed will keep rates elevated and what ripple effects the central bank’s monetary policy will have on the broader economy. The Fed must be cautious not to jeopardize its soft landing objective that seems increasingly likely given the continued strength of the labor market and inflation steadily approaching the Fed’s two percent target. 

Too Late to Avert a Government Shutdown?

With nine days before the funding for the federal government runs out and lawmakers returning home for the weekend, a federal government shutdown come October 1 now appears all but inescapable. 

On Thursday, Speaker Kevin McCarthy (R-CA) sent the House home until next Tuesday after a vote to start debate on a key military funding bill failed for the second time this week. A few disruptive Republican members opposed advancing the measure, demanding deeper spending cuts. Thursday’s vote defeated the measure by 212-216. 
The vote is another hit for McCarthy. On Sunday night, House Republicans released a draft continuing resolution (CR) to extend funding to the federal government through October 31. The CR, drafted by leaders of the Main Street Caucus and Freedom Caucus, would cut 8.1 percent of spending on all non defense accounts except the Department of Veterans Affairs and disaster relief.

With a few Republicans obstructing progress in the House, Senate Majority Leader Chuck Schumer (D-NY) has begun the process to push spending legislation through the upper chamber. Schumer reportedly plans to replace language in the FAA reauthorization bill with a continuing resolution, allowing the Senate to circumvent the constitutional requirement that federal spending bills originate in the House. The success of such a strategy is far from certain, given some House Republicans’ reluctance to fund the federal government, one of the most basic duties they were elected to fulfill.

Updates on the UAW strike

This morning, the United Auto Workers (UAW) union announced that it will escalate its ongoing strike against the Big Three Detroit automakers – Ford Motors, General Motors, and Stellantis. Workers at all 38 parts and distribution centers at General Motors and Stellantis across 20 states joined the strike at noon ET today. 

Last Friday, the union instructed a total of about 13,000 at one plant owned by each of the three companies to walk out, hitting three companies at once for the first time in its history. This week, the UAW announced that it had significant increases in offers made by Ford, and as such decided not to expand the number of Ford employees on strike. Expanding the strike to parts and distribution centers that transfer parts to dealerships to be used in vehicle repairs targets repairs, a major source of profits for automakers. 

GM called the expansion “unnecessary” and claimed that it would “continue to bargain in good faith” in response to the UAW’s announcement. GM and Stellantis’s move to layoff over 2,000 employees last week, however, seems opposed to the cooperation needed to resolve negotiations.

Hearings and Markups this Week

House Capital Markets Panel Reviews SEC Oversight

Director of the Securities and Exchange Commission (SEC) Division of Investment Management William Birdthistle testified before the House Committee on Financial Services Subcommittee on Capital Markets on Tuesday morning in its third hearing this year on oversight of the federal agency. 

Division Director Birdthistel faced strong pushback over the agency’s proposed rulemaking and the rulemaking process itself. Subcommittee Republicans claimed that the SEC had relied on speculative statements rather than evidence, allowed short or inadequate comment periods, and was reluctant to consider congressional views throughout the process, but as Subcommittee Ranking Member Brad Sherman (D-CA) stated in his opening remarks, “almost everyone who criticizes the process, simply doesn’t want you to get to the destination.”

The Subcommittee focused on several proposed rules, including the

• Swing pricing rule 
• Hard close rule
• Liquidity risk management rule

The SEC’s proposed rule on swing pricing received particular attention. Earlier this month, over thirty members of congress, including Subcommittee Chair Ann Wagner (R-MO) and Ranking Member Sherman, sent a letter to the SEC calling on the agency to withdraw the proposed rule. 

House Financial Services on Banking Reg Proposals

The House Committee on Financial Services Subcommittee on Financial Institutions and Monetary Policy convened on Tuesday afternoon to consider the interaction and overall economic impact of four recent proposals by banking regulators. 

Four major rules have been proposed over the past few months to strengthen the banking industry’s ability to withstand stresses and shocks:

• Basel III endgame proposal, proposed by the Fed, FDIC, and OCC on July 27 – the proposal would implement stricter capital requirements on banks with $100 billion or more in assets to bring U.S. banks into compliance with Basel III requirements.

• GSIB surcharge proposal, proposed by the Fed on July 27 – the proposal would improve the precision of the GSIB surcharge and better measure systemic risk under the framework.

• Long-term Debt proposal, proposed by the Fed and FDIC on August 29 – the proposal would require banks with $100 billion or more in assets to keep greater reserves of long-term debt.

• Resolution planning proposal, proposed by the Fed and FDIC on August 29 – the proposal would require FDIC-insured banks with $50 billion or more in assets to submit resolution plans to the FDIC. 

The hearing comes amid strong opposition to the proposals from banking industry groups and their Republican allies. Just last week, six banking industry groups sent a letter to the Fed, FDIC and OCC accusing them of violating the Administrative Procedure Act in proposing the Basel III endgame proposal and Committee Republicans echoed their sentiments in their own letter calling for regulators to withdraw the proposal. 

Senate Banking on Looming Child Care Funding Cliff

On Wednesday, the Senate Committee on Banking, Housing, and Urban Affairs Subcommittee on Economic Policy held a hearing titled “Child Care Since the Pandemic: Macroeconomic Impacts of Public Policy Measures.” The hearing highlighted the looming child care funding cliff in which COVID-19-related child care funds will run out at the end of the 2023 fiscal year on September 30. 

The obligation or liquidation of one-time COVID-19-related child care appropriations would have broad implications for American families. As Subcommittee Chair Elizabeth Warren (D-MA) highlighted, about 70,000 child care programs will close. This could lead to three million children losing care and hundreds of thousands of child care workers losing their jobs. 

The hearing follows the release of the latest data on child poverty that showed levels rebounding faster than ever after hitting historic lows over the past two years. The poverty rate for children hit a historic low of 5.2 percent in 2021 following a series of pandemic-driven policy decisions, including the expansion of the Child Tax Credit (CTC). The child poverty rate rose to 12.4 percent in 2022 with the CTC’s expiration. The data is a glaring illustration of the fact that child poverty is a policy choice. We call on Congress to expand the CTC and reverse this dangerous trend. 

House Financial Services Advances Anti-CBDC Bill

During a Wednesday markup, the House Financial Services Committee passed eleven pieces of legislation out of Committee, including a bill intended to halt any effort to advance the development and issuance of a central bank digital currency (CBDC) in the United States. 

H.R. 5403, the “CBDC Anti-Surveillance State Act” was passed out of the Committee and reported favorably to the House floor in a 27-0 vote. The bill, led by Representative Tom Emmer (R-MN), would prevent the Federal Reserve from issuing a CBDC directly or indirectly to individuals or maintaining accounts on behalf of individuals.

The remaining bills reported favorably out of Committee include:

• The Financial Access Improvements Act, H.R. 5523 led by Ranking Member Maxine Waters (D-CA) would provide Congress with insights into whether foreign jurisdictions are improving their Anti-Money Laundering regimes. 

• The Russia and Belarus Financial Sanctions Act of 2023, H.R. 5512 led by Representative Brad Sherman (D-CA) would require a U.S. financial institution to comply with U.S. financial sanctions applicable to Russia or Belarus

• The Foreign Affiliates Sharing Pilot Program Extension Act, H.R. 5524 led by Representative Sylvia Garcia (D-TX) would ensure that the program can be executed over the full three years 

Whether these bills will be considered on the floor will remain to be seen, but movement is not likely until Congress resolves the ongoing appropriations fight.