Update 724 — Days Grow Few, Down to Two: As Nation Confronts Government Shutdown

While two days and a few votes in Congress remain before the federal government enters the 2024 fiscal year at 12:00 am on Sunday, the prospects for a budget agreement by then to fund operations are vanishingly small. For millions of federal workers and program beneficiaries, life will not go on as usual. The questions will soon be, how long will the shutdown last, and what will it mean for the nation?

At risk is everything from national security to food security to economic growth. The Fed, trying to engineer a soft landing, would function without access to gold-standard data it depends on to make policy. The surge in oil prices, resumption of student loan payments, continuing autoworker strike, slumping consumer sentiment, will add to the difficulty of the Fed’s next rate-setting decision. We take a look ahead at the implications of a shutdown and the economic developments of the week, below.

Good weekends in any event…

Best,

Dana

In Memoriam: Senator Dianne Feinstein

When Senator Feinstein was elected in 1992, she was one of only four women serving in the upper chamber at the time. She broke barriers, becoming the first woman to sit on Senate Judiciary, eventually chairing the Committee, the only non-attorney to do so. She ended her career as the longest-serving female U.S. Senator in history, serving six terms in all. Feinstein cast her last vote yesterday, supporting the motion to proceed to a funding bill to keep the government from shutting down.

Preview of Next Week

Bracing for a Government Shutdown

The federal government will shut down when Fiscal Year 2023 ends at 12:01 a.m on Sunday, if a small group of House Republicans continues to stymie efforts to pass a budget for Fiscal Year 2024, or a Continuing Resolution, legislation to extend current funding for the federal government before the deadline.

Late last night, the House managed to pass three bills by a handful of votes to fund the Departments of Defense, State, and Homeland Security for Fiscal Year 2024, The bills include tens of billions in spending cuts that the Senate and White House oppose. A fourth bill to fund the Department of Agriculture failed. This brings the total number of FY24 spending bills passed by House Republicans to four, leaving eight such bills still unpassed. 

The House is set to vote on a Continuing Resolution (CR) later today. The hold-up remains a small group of House Republicans who continue to obstruct the effort to avert a shutdown, insisting on various social policy riders and border security provisions. Yesterday, twenty-seven House Freedom Caucus members sent a letter to Speaker Kevin McCarthy (R-CA). The group says it will not support a CR unless individual appropriations bills are passed first, making a shutdown all the more likely. 

On Tuesday, Senate leadership released H.R. 3935, a CR negotiated by Senate leaders on both sides of the aisle that would fund the government at varying levels through November 17. The bill includes roughly $6 billion in aid to Ukraine and another $6 billion in funding for domestic disaster response. Yesterday, McCarthy said that the House would not take up the Senate’s CR. 

The shutdown would have an almost immediate impact. Funding to the WIC (Women, Infants and Children) program, which helps nearly seven million pregnant and postpartum mothers and children under six, would be cut off within days of a shutdown. States may use carryover funds or their own state funds to stagger the impact of reduced access to WIC funding on families. The Head Start and Meals on Wheels programs could also be affected. 

A shutdown would also have broader macroeconomic impacts on the U.S.’s credit rating and GDP. On Monday, Moody’s Investors Service warned that even a short shutdown would have a “credit negative” impact, and could potentially lead to a downgrade of the United States’s current “Aaa” rating. Fitch Ratings downgraded the U.S. credit rating from “AAA” to “AA+” in August. According to Goldman Sachs, GDP would fall by 0.2 percentage points over each week of a shutdown. In addition, the data-dependent Federal Reserve would not receive the government-issued reports it relies on for information on employment, inflation, and economic activity. 

How long a shutdown will last is the question of the moment. The longer it does, the graver the impact on federal programs and beneficiaries. Complicating matters is the possibility of a motion to vacate threatened principally by Rep. Matt Gaetz (R-FL), a procedural step in the effort to replace Kevin McCarthy as House Speaker. Should that vote succeed, the House would cease to function as a legislative body until a successor to McCarthy is chosen, making passage of a CR or an agreement on FY24 funding impossible in the interim. 

Supreme Court Hears Case Against the CFPB

On Tuesday, the Supreme Court will hear oral arguments in Consumer Financial Protection Bureau (CFPB) v. Community Financial Services Association of America, Limited (CFSA), a case that challenges the constitutionality of the Bureau’s funding mechanism. 

The CFPB was created in the aftermath of the 2008 financial crisis to enforce consumer protection laws and keep financial markets functioning smoothly in a fair, competitive and transparent manner. Since then, the Bureau has protected consumers and held predatory businesses accountable. The CFPB has secured over $15 billion on behalf of consumers – over $13.5 billion in relief for up to 175 million consumers in the form of restitution (money returned to them) or canceled debt and $1.8 billion in civil penalties paid by companies that cheated consumers. 

The interests that the CFPB stands up against have attacked the Bureau since its inception, and the case before the Court is just the latest attempt to undermine the Bureau. The dispute stems from a 2018 lawsuit filed against the Bureau by the CFSA, the payday lending industry’s top lobbying group, and a Texas affiliate, to challenge the Bureau’s 2017 Payday Lending Rule. Last year, the U.S. Court of Appeals for the Fifth Circuit ruled that CFPB’s power to establish the rule came from its “unconstitutional” funding structure and invalidated the rule. The case before the Supreme Court challenges the Fifth Circuit’s decision. 

If the CFPB’s funding mechanism is found unconstitutional, the validity of all its rules protecting consumers and providing stability for markets could suffer the same fate as the Payday Lending Rule. The case could also have spillover effects to a broad range of similarly-funded federal agencies, including financial regulators not subject to annual Congressional appropriations such as the Fed, the OCC, and FDIC, and as well as programs, including entitlement programs funded through trust funds. 

Core Inflation Cools in August

Core inflation continued to cool in August. The latest personal consumption expenditures (PCE) price index data released by the Bureau of Economic Analysis this morning shows that core PCE, which excludes more volatile food and energy prices, rose by just 0.1 percent in August, the smallest monthly increase since November 2020, down from month-on-month increases of 0.2-0.3 percent over the past five months. Over the past year, core PCE has increased by 3.9 percent, down from a year-on-year increase of 4.2 percent in July. 

Headline inflation rose by 3.5 percent year-on-year, up from a 3.3 percent year-on-year increase in July. Prices rose by 0.4 percent on a monthly basis last month, remaining relatively low following month-on-month increases of 0.1-0.3 percent in each of the last five months. Last month’s increase in headline inflation was driven by energy costs, which rose by 6.1 percent over the month.

Today’s release of new inflation data is welcome news for the Federal Reserve and follows the central bank’s decision to hold interest rates steady at 5.25-5.50 percent, a 22-year high, at last week’s Federal Open Market Committee (FOMC) meeting. The Fed has signaled that a 25 basis point rate hike may be in the cards for one of the two remaining FOMC meetings this year, depending on yet-to-be-released data on the labor market and inflation. 

The central bank’s next interest rate decision will likely be more complicated if Congress fails to avert the looming government shutdown. In the case of a shutdown, the Bureau of Labor Statistics, the Census Bureau and the Bureau of Economic Analysis would suspend operations. This could delay the release of key economic data that the Fed usually relies on to decide the fate of interest rates. These include three reports set to be released before the next FOMC meeting on October 31 and November 1: 

• The September jobs report, set to be released next Friday, October 6
• The September consumer price index (CPI) report, set to be released on October 12
• The September personal consumption index (PCE) report, set to be released on October 27

As mentioned above, should the shutdown persist beyond that, the Fed may also have to go without access to additional data on the labor market and inflation scheduled to be released ahead of the FOMC’s final meeting of 2023 on December 12 and 13. 

Disrupting access to relevant data at such a delicate point in the Fed’s rate hike cycle threatens to jeopardize a sought-after soft landing. It is remarkably ironic that a few extreme Republicans claiming to prioritize growth and the long-term economic well-being of the United States see fit to risk endangering the resilience of the labor market and progress in the effort to cool inflation in their obstructionist pathway. 

Strike Updates

The UAW Strike Expands

This morning, the United Auto Workers (UAW) union announced that it will once again escalate its ongoing strike against the Big Three Detroit automakers — Ford Motors, General Motors, and Stellantis — as the union continues to negotiate the contracts of 146,000 autoworkers. At noon today, about seven thousand additional autoworkers at Ford’s assembly plant in Chicago and GM’s Delta Township plant in Lansing, Michigan will join the picket lines.  The company Stellantis was spared in this round of expanded strikes.  

Last Friday, workers at all 38 parts and distribution centers at General Motors and Stellantis across 20 states joined the strike. Negotiations remain tense as the strike heads into its third week. Visits by President Biden, who addressed picketing workers at a striking plant by bullhorn and by Donald Trump, who spoke to a small number of workers at a non-union plant, underscored the political significance of issues facing working class voters in the swing state of Michigan, the Midwest, and beyond. 

The Writers’ Strike Reaches a Resolution

The writers’ strike formally ended this week after almost five months. On Tuesday, the Writers Guild of America (WGA) board voted unanimously to approve a contract agreement with the Alliance of Motion Picture and Television Producers (AMPTP) which represents studios, streaming services and production companies. The three-year minimum basic agreement would:

• Increase pay minimums for most writers by 5 percent on ratification of the contract, with a 4 percent increase next May and a 3.5 percent increase in May 2025
• Raise the rates of healthcare and pension contributions
• Provide bonuses and residuals based on viewership for streaming
• Increase minimum numbers of writers

The deal must now be ratified by the guild membership through a vote.

Hearing

SEC’s Gensler before House Financial Services

Securities and Exchange Commission (SEC) Chair Gary Gensler testified before the House Committee on Financial Services on Wednesday morning in a hearing focused on oversight of the SEC. The hearing comes as Republicans in both chambers continue to criticize the agency for its ambitious rule-making agenda, position on digital assets, and responsiveness to Congress.

Committee Chair Patrick McHenry (R-NC) suggested that a subpoena against the SEC Chair would be his next step following the Committee’s multiple requests for documents and the agency’s “unresponsiveness.” As Chair Gensler emphasized, the agency has been working with the committee and provided public documents in response to their requests. 

Ranking Member Waters (D-CA) focused her questioning on understanding the impact of the looming government shutdown on the SEC and its work. In the case of a shutdown, Gensler stated that the agency’s staff would be severely reduced, with over 90 percent of its roughly 5,000 employees being furloughed. Gensler explained that this impact would be felt across the agency, reducing the SEC’s ability to effectively oversee markets. The SEC would also be unable to review documents necessary to allow companies to proceed with their initial public offerings (I.P.O.s). 

Corrections

Our update last Friday contained two errors in the section titled “House Financial Services Advances Anti-CBDC Bill.”

• The CBDC Anti-Surveillance State Act was passed out of the Committee and reported favorably to the House floor in a 27-20 vote, not a 27-0 vote
• The Russia and Belarus Financial Sanctions Act of 2023, would require the foreign subsidiary of a U.S. financial institution – rather than a U.S. financial institution as was previously stated – to comply with U.S. financial sanctions applicable to Russia or Belarus