In late breaking news, the House GOP has dropped the nomination of Rep. Jim Jordan for Speaker, ending a bid that had fallen short in three ballots of voting and was marked by grave threats issued against opponents. After another week of House GOP speakership debate and balloting, full of sound and fury signifying nothing, the chamber remains suspended, unable to act on legislation. Off the table for now is the idea of endowing Speaker pro tempore Patrick McHenry with the authority of an elected speaker, as McHenry vowed to quit the post if pressured to assume that authority without a vote.
Meanwhile, the Fed’s “higher for longer” rate policy took a toll this week. Thirty-year mortgage rates hit eight percent for the first time since 2000. Sales of existing homes for September fell to a 13-year low. Yesterday, 10-year Treasury yields broke through five percent, a rate not seen since 2007. Earlier today, President Biden sent a $106 billion international aid package to a paralyzed Congress. We cover the above, relevant Congressional hearings, and the week’s other developments below.
Good weekends, all…
GOP Fight for House Speaker Back to Square One
With no clear path to 217, the House Republican conference voted this afternoon to remove Representative Jim Jordan (R-OH) as its nominee through a secret ballot vote. This development came shortly after Jordan lost again in the third round of balloting this morning. As House Republicans scramble to nominate a new candidate for speaker, it appears that Rep. Austin Scott (R-GA) will try his luck for a second time following a narrow loss to Jordan last week.
Although he received the Republican Conference’s nomination for Speaker of the House late last week, Jordan was unable to garner enough support from within his own party over any of the three rounds of voting this week. Votes in favor of Jordan’s bid for the speakership decreased from 200 to 199 on Tuesday and Wednesday, ultimately falling to 194 today.
Loss of support for Jordan prompted House members to reconsider the role that Speaker Pro Tempore Patrick McHenry (R-NC) could play in returning the House to legislative action. Although many saw the temporary extension of McHenry’s authority as a path forward in the event that the Republican conference was unable to rally behind Jordan, the proposal gained enough opposition for it to be withdrawn. House Republicans, including McHenry himself, worried about the precedent the move would set and the potential power-sharing agreement with Democrats that would be needed to clear a vote on the House floor.
It is worth noting that the Chair of the House Appropriations Committee, Representative Kay Granger (R-TX), held steady in her opposition to Jordan through all three rounds of voting. This echoes concern about the need for a Speaker to be elected who can help Congress find agreement on a full funding package for FY 2024 before November 17. While infighting continues on the Republican side, Democrats remain united behind Minority Leader Hakeem Jeffries (D-NY).
Meanwhile, the Senate came back into session this week and continued to make progress on a “minibus” consisting of three appropriations bills. Although they are still in the process of approving relevant amendments, the successful passage of this package could lead to the use of additional “minibuses” to streamline budget negotiations in the coming weeks.
Bond Yields: Good News, Bad News
Yields on benchmark 10-year Treasuries reached a 16-year high on Thursday, briefly topping 5 percent after a sell-off in the bond markets. The historic high came after Fed Chair Jerome Powell’s speech yesterday re-affirming the Fed’s commitment to maintaining high interest rates until it reaches its two percent inflation target, as the labor market remains stubbornly resilient in the face of interest rate hikes. Just two weeks ago, the unexpectedly strong September jobs report showed that 336,000 jobs were added to the economy over the month, while retail sales and food services spending rose by 3.8 percent over the past year.
Yields on Ten-Year Treasuries (2007-Present)
The latest increase in long-term rates is slamming stock prices, with all major indices falling close to one percent yesterday. Over time, the trend is likely to create new cracks in the economy as well.
But it is precisely the strength of the underlying economy — particularly in the labor market and consumer spending — that has convinced investors that the Fed’s goal may be as much as two years away. “Does it feel like policy is too tight right now? I would have to say no. Our 2 percent inflation goal is likely to require a period of below-trend growth and some further softening in labor market conditions,” Powell said at the Economic Club of New York yesterday.
Another factor moving markets is the increasing issuance of government debt, requiring a greater supply of Treasuries following the government response to the pandemic over 2021-22, depressing bond prices and fueling yields. The consequent increase in the so-called “term premium” — the extra yield investors demand as they worry that rates could change over the term they have to hold the bond — has pushed Treasury yields to heights not seen since 2007.
Consumers, particularly the affluent, have continued spending and borrowing in the face of higher rates. Americans with credit card debt face steep credit card interest rates amid the Fed’s cycle of rate hikes. But, due largely to overall consumer activity, economic projections point to a marked increase in U.S. gross domestic product in the third quarter, perhaps as high as a 3.5 percent increase, the largest in two years.
The overall picture is further complicated by the views expressed recently by several Board Governors that the surge in bond yields may obviate the need for further Federal Reserve rate hikes. We will return to the market response to the Fed’s monetary policy next week in advance of the Fed’s Federal Open Markets Committee meeting to consider its next interest rate move, following their next meeting on October 31 and November 1.
Microsoft Finalizes Activision Acquisition
Last Friday, Microsoft announced that it had closed its $69 billion acquisition of Activision, one of the most expensive consumer tech acquisitions in history. The deal could have major impacts on competition in the video game industry.
The deal was finalized despite objections by the Federal Trade Commission (FTC) that the deal would erode competition in the video game market. Last December, the FTC issued a complaint in the U.S. District Court for the Northern District of California, seeking to block Microsoft Corp. from acquiring Activision Blizzard, Inc. While the complaint failed, the FTC is appealing the court’s decision in the Ninth Circuit Court of Appeals. After the deal’s closure was announced, a spokesperson for the FTC said that the agency would continue its challenge.
The deal could have major anti-competitive implications for the industry if Microsoft, for example, uses its newfound power to restrict Activision Blizzard games and products from competitors’ consoles, making them exclusively accessible through Microsoft’s own cloud gaming platform. Reduced competition in the industry could also drive prices up for consumers and give Microsoft significant access to consumer data.
The United Auto Workers (UAW) union strike against the Big Three Detroit automakers — Ford Motors, General Motors, and Stellantis — continued this week after an expansion to Ford’s largest factory, its Kentucky Truck Plant, last week.
Kaiser Permanente Tentatively Ends Strike
The Coalition of Kaiser Permanente Unions, representing roughly 40 percent of workers at Kaiser Permanente hospitals and clinics across the country, has reached a tentative agreement with the hospital system. The deal comes after the coalition staged the largest health care strike in U.S. history earlier this month when about 75,000 of its members joined the picket line over three days in California, Colorado, Oregon and Washington.
The deal would include concessions from the hospital system. The deal would:
- increase wages by 21 percent over four years
- institute a $25/hour minimum wage in California and a $23/hour minimum wage in other states
- impose new restrictions on hiring subcontractors and using outside firms to provide temporary staffing
- require Kaiser to invest in job training programs and other workforce development efforts
Notably, Kaiser Permanente has said that it will work to fill some vacant positions. Staffing shortages, described by the coalition as dangerous, were a key concern raised by the union. The deal is the latest example of a successful negotiation by a union following collective action in the form of a historic strike. The power of labor organizing in the current moment is clear.
Hearings This Week
House Budget Hearing on Bipartisan Fiscal Commission
The House Budget Committee convened Thursday to discuss the need for a fiscal commission that would be tasked with tackling the growing national debt. Members of the committee were joined by former Senator Rob Portman (R-OH), former Senator Kent Conrad (D-ND), former Budget Chairman Steve Womack (R-AR), and former Budget Chairman John Yarmuth (D-KY).
All parties present agreed on the need for timely and significant action to address the national debt, which surpassed $33 trillion roughly one month ago. Additionally, growing interest payments on the debt caused concern as they have reached an annual net value of $663 billion. According to projections from the Peter G. Peterson Foundation, the annual net value of interest payments on the national debt will increase to $1.4 trillion by 2033.
Source: Peter G. Peterson Foundation
Participants in the hearing expressed differing opinions about whether or not a fiscal commission would be the best way to reverse this trend. Former Senators Rob Portman and Kent Conrad suggested that we can use the blueprint laid forth by past efforts like the Greenspan Commission and Simpson-Bowles Commission to inform a fiscal commission that can bridge partisan divides and spark much-needed action. On the other hand, former Budget Chairmen Steve Womack and John Yarmuth were less optimistic given current political conditions.
The discussion signaled that more conservative supporters of the idea of a fiscal commission are focused on cutting entitlement programs to help balance the budget. While some more conservative participants acknowledged that a commission would have to consider all possibilities, such as raising revenues and cutting spending, it is unlikely that bipartisan consensus could be reached if cuts to entitlement programs are on the table.
Because some members had to leave the hearing early to meet with their respective conferences before an expected 12 PM vote, Chair Jodey Arrington (R-TX) suggested bringing witnesses back at a future time to continue the discussion about the creation of a fiscal commission. As this discussion continues, it will be important to monitor the progress of two proposed pieces of legislation:
- The Fiscal Commission Act of 2023 – Creating a fiscal commission consisting of twelve members of Congress and four outside experts (three members of Congress and one outside expert appointed by majority and minority leaders in each chamber of Congress).
- The Sustainable Budget Act – Creating a fiscal commission consisting of eighteen members of Congress (six appointed by the President, three appointed by majority and minority leaders in each chamber of Congress).
Senate Banking Hearing on CDFIs
On Tuesday, the Senate Banking Committee’s Subcommittee on Housing, Transportation, and Community Development held a hearing on Community Development Financial Institutions (CDFIs). CDFIs are lenders that provide financial services to underserved communities such as people of color, Native Americans, rural communities, and low-income communities that would otherwise have difficulty accessing financial services from conventional banks and lenders. There are more than 1,300 CDFIs in America managing more than $222 billion in financial aid for projects such as starting up small businesses or buying homes. CDFIs played a crucial role in providing pandemic relief to businesses, helping to roll out more than $34 billion in PPP loans, with nearly 40% going to entities in low and middle income areas.
Subcommittee members from both parties – including Senators Tina Smith (D-MN), Cynthia Lummis (R-WY), John Fetterman (D-PA), Jon Tester (D-MT), Bob Menendez (D-NJ), and Katie Britt (R-AL) – all voiced support for CDFIs’ work in promoting housing and economic development for underserved communities.
The three witnesses – each of whom are presidents and CEOs of a CDFI or an organization dealing with CDFIs – emphasized the importance of CDFI work in promoting community development, business development, and increased homeownership in troubled communities, with particular focus on rural communities, communities of color and Native American communities. According to Julia Nelmark, President and CEO of the Midwest Minnesota Community Development Corporation, CDFIs leverage federal dollars to economic growth at a ratio of 10 to 1. They voiced their support for the U.S. Treasury’s CDFI Bond Guarantee Program, which recently guaranteed $300 million for the program. They also emphasized the need for rule changes that would allow greater flexibility for CDFIs to serve their communities.
Senate Energy Hearing on IRA and BIL Loan Policies
On Thursday, the Senate Energy and Natural Resources Committee held a hearing on the decision-making process for awarding the grants and loans funded through the Inflation Reduction Act (IRA) and the Bipartisan Infrastructure Law (BIL). The witnesses – officials representing the Department of Energy (DoE) – were called to testify concerning the transparency of the application vetting process, the decision-making process for awarding grants and loans, how the DoE is ensuring that taxpayer dollars are being spent effectively and not being used to fund foreign actors, and concerns about conflicts of interest in the Loan Program Office (LPO).
Under Secretary for Infrastructure David W. Crane and Director of the LPO Jigar Shah praised the programs created by the IRA and BIL. According to Crane, the DoE has already issued or committed more than $13 billion just for electric vehicle and battery storage supply chains, and in the last week alone, made more than $10 billion in awards for hydrogen hubs and other technologies. According to Shah, there are 177 active grant and loan applicants seeking over $157 billion in financing for their projects. Both expected the IRA and BIL’s grants and loans programs to generate billions in investment and create millions of jobs. DoE Inspector General Teri L. Donaldson, on the other hand, expressed concern that her office was underfunded and understaffed for the task of overseeing an office responsible for awarding billions for clean energy projects. Senators John Barrasso (R-WY), Bill Cassidy (R-LA), and Josh Hawley (R-MO) criticized the LPO for what they claim to be a lack of transparency in their decisions to accept or reject applications, and accused the office of fixing the process to benefit specific applicants.
While Senator Joe Manchin (D-WV) expressed concern that the IRA was deviating from its intended mission of guaranteeing energy security, Senators Martin Heinrich (D-NM), Mazie Hirono (D-HI), John Hickenlooper (D-CO), Alex Padilla (D-CA), Catherine Cortez Masto (D-NV), and Lisa Murkowski (R-AK), asked questions about the potential for the DoE’s IRA and BIL grants and loans to spur manufacturing, invest in emerging technologies, and modernize electric infrastructure among other potential projects, with many pointing to existing and future projects approved for their own states.
Hearing on the Appointment of Tanya Otsuka to NCUA Board
On Thursday, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing to consider several nominations, including the nomination of Tanya Otsuka to the three-person Board of the National Credit Union Administration (NCUA) for a six-year term. The NCUA is responsible for regulating federal credit unions, insuring deposits, and protecting members of credit unions.
Committee Chair Sherrod Brown (D-OH) described Otsuka as “exceptionally well qualified” having spent over decade working on financial services law and policy, previously serving in roles at the Federal Deposit Insurance Corporation (FDIC) and on the staff of the Senate Banking, Housing, and Urban Affairs Committee.
Otsuka highlighted the importance of small credit unions that serve many areas that lack access to financial services and said that one of her priorities on the NCUA board would be to ensure that these institutions remain competitive and capable of providing affordable services to its members.
Tuesday, October 24th
- Federal Reserve Open Board Meeting to consider the final rule to revise the regulation implementing the Community Reinvestment Act
- House Financial Services Committee Subcommittee on Capital Markets Hearing: Examining the SEC’s Agenda: Unintended Consequences for U.S. Capital Markets and Investors
- House Financial Services Committee Subcommittee on Financial Institutions and Monetary Policy Hearing: The Tangled Web of Global Governance: How the Biden Administration is Ceding Authority Over American Financial Regulation
- House Financial Services Committee Subcommittee on Housing and Insurance Hearing: The Factors Influencing the High Cost of Insurance for Consumers
- Senate Judiciary Committee Subcommittee on Competition Policy, Antitrust, and Consumer Rights: Examining Competition and Consumer Rights in Housing Markets
Wednesday, October 25th
- House Financial Services Committee Subcommittee on Digital Assets, Financial Technology and Inclusion Hearing: Modernizing Financial Services Through Innovation and Competition