Update 738 — Immaculate Disinflation: Felt or Not, Prices Nearer Fed’s Target

Despite popular perception, statistics bear out the signs that the U.S. economy is not just withstanding the shock and duration of the Fed’s campaign to combat inflation. Unemployment at the lowest levels seen in decades, this week’s revised third quarter GDP gain of 5.2 percent, as well as the October data on prices, which we open with, confirm that the U.S. economy’s pandemic recovery remains strong compared with the rest of the world. 

Congressional budget negotiations continued this week, with the surprising development that the House Freedom Caucus Chair’s concession that the group has dropped its longstanding insistence on a $1.47 trillion top-line discretionary spending cap, agreeing instead on the bipartisan figure of $1.59 trillion. Inflation, FY24, and progress on NDAA and the supplemental requests are the week’s top developments, covered below.

Good weekends, all…




Inflation Continues to Fall in October

The personal consumption expenditures (PCE) price index – the Fed’s preferred measure of inflation – continued to cool last month in a positive sign for the Federal Reserve ahead of its next meeting. 

Core PCE, which excludes food and energy prices, rose by 0.2 percent in October, down from 0.3 percent in September. Core PCE has increased by 3.5 percent over the past 12 months, down significantly from the highs of over 5 percent reached during 2022. These gains, the narrowest since the spring of 2021, notably continue the downward trend in core PCE seen steadily over the past year. 

Source: Council of Economic Advisors

Headline PCE remained flat last month after rising by 0.4 percent over each of the two months prior. Headline PCE rose by 3.0 percent on a year-on-year basis. The fall in core PCE was led by a reduction in energy prices, which fell by 2.6 percent over the month. 

October PCE data shows that inflation is steadily heading down. The Federal Open Market Committee (FOMC) will likely see progress on inflation as an indicator that their series of interest rate hikes is having its intended effect on inflation. The FOMC will decide on the fate of interest rates at its final meeting of the year on December 12-13.

Fed officials will additionally consider several other major data points, including recent data on:

  • Q3 GDP – Real gross domestic product (GDP) increased at an annual rate of 5.2 percent in the third quarter of 2023 according to the second estimate released by the Bureau of Economic Analysis on Wednesday. 
  • October CPI data – Consumer Price Index (CPI) data showed that inflation continued to cool in October with core CPI rising by 0.2 percent on a monthly basis and by 4.0 percent on a year-on-year basis. This represents the lowest annualized increase in core CPI since September 2021.
  • November Jobs report – The Fed will be watching for signs of cooling in the labor market when the November jobs report is released next Friday. Unemployment has remained relatively low and job gains have remained strong despite the Fed’s series of interest rate hikes. Fed officials will be looking for signs of moderation.

Economic data released over the past month may incline the FOMC to hold the federal funds rate steady at the 5.25-5.5 percent range rather than increase rates by a further 25 basis points. Continued resilience in the labor market would increase the likelihood that the Fed can pull off a soft landing, though risks of the high interest rate environment persist. 

Other Developments 

Freedom Caucus OKs Higher Top-Line Spending Caps

On Wednesday, House Freedom Caucus (HFC) Chair Scott Perry (R-PA) expressed that members would support the FRA top-line spending cap of $1.59 trillion over the $1.47 trillion cap that they have demanded throughout the appropriations process. Much of the House’s inability to pass appropriations bills can be attributed to the difficulty of garnering widespread GOP support for the HFC’s demands for steep spending cuts and controversial policy riders. By ceding to the higher spending cap, Perry is hopeful that the two chambers will now be able to begin conferencing appropriations bills and ironing out key differences. 

This concession could signal that even the most extreme members of the House seek to avoid the government shutdowns looming in January and February. HFC Member Representative Chip Roy (R-TX) asserted that the $1.59 trillion figure from the FRA is only a spending cap, and that work can still be done to decrease funding levels in the final versions of the FY24 appropriations bills. The agreement to a higher top-line cap does not necessarily mean that the appropriations process will go any more smoothly from here on out. 

Senate Shifts Focus to Supplemental Package

On Monday, Senate Majority Leader Chuck Schumer (D-NY) expressed his intentions to bring legislation for President Biden’s comprehensive national security emergency supplemental funding request to the Senate floor as early as next week. Although the House previously sent a stand-alone bill for Israel aid to the Senate, the upper chamber has shown no desire to pass a supplemental bill that does not include critical funding for Ukraine and the Indo-Pacific.

Complicating a national security supplemental funding package are GOP calls for immigration reform, such as changes to the decades-old asylum system, as well as border funding. A bipartisan group of six senators is tasked with striking a deal on this highly partisan policy in time for next week’s vote. This group is led by Senators Chris Murphy (D-CT) and James Lankford (R-OK) and includes senators:

  • Michael Bennet (D-CO)
  • Thom Tillis (R-NC)
  • Lindsey Graham (R-SC)
  • Kyrsten Sinema (I-AZ)

In an interview with CBS News on Tuesday, Senator Lankford reiterated the Republican conference’s stance that these policy changes are necessary for Republican support and ultimate passage of the supplemental package. GOP opposition to additional funding for Ukraine and Senate Democrats’ requests for conditions on funding for Israel are gaining prominence amidst mounting deaths of civilians in Gaza.

Cautious Optimism on Passage of This Year’s NDAA

On Wednesday, the House-Senate Conference Committee negotiating the FY24 National Defense Authorization Act (NDAA) met to pass the gavel to the Chairman of the House Armed Services Committee, Representative Mike Rogers (R-AL). Though this was likely the only meeting of the conference committee, Hill staffers have been working behind the scenes to iron out differences present in the House and Senate versions of the NDAA.

The House version of the bill contains policy riders focused on addressing contentious social issues. But despite marked differences between House and Senate proposals, Representative Mike Rogers (R-AL) expressed optimism that the NDAA will be able to see action as early as next week.Nevertheless, yesterday, House Republicans pressed Speaker Johnson to secure tangible wins on the NDAA. Wins for the Republican Conference include an extension of foreign surveillance authorities and limits on:

  • the Pentagon’s abortion travel policy.
  • funding for medical treatment for transgender troops.
  • military diversity programs.

Though Johnson’s speakership is not likely implicated, frustration is mounting, stemming from the passage of the “clean” CR just two weeks ago. The new Speaker was given a “mulligan” before but is unlikely to receive another.

The NDAA is also being targeted as a potential vehicle for a tax package that would include funding for the Child Tax Credit (CTC) as well as a national security supplemental funding package. If Congress can move forward with the NDAA reauthorization as it has for the past 62 years, it would be one of the last major pieces of legislation in 2023, making it a tempting vehicle to pass other bills.


Chopra Delivers Semi-Annual Testimony Before Congress

This week, Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra testified before the Senate Committee on Banking, Housing, and Urban Affairs and the House Financial Services Committee to present the Bureau’s Semiannual Report to Congress.

Republicans in both Committees continued to attack the constitutionality of the Bureau’s funding and leadership structures in addition to the CFPB’s proposed and finalized rules to protect consumers and financial stability. Democrats, meanwhile, defended the Bureau’s work to return over $20.2 billion to more than 205 million consumers since 2021.

Focus on the Small Business Lending Rule

House Financial Services Committee Ranking Member Maxine Waters (D-CA) highlighted the importance of the Small Business Lending Rule, which helps prevent discrimination in small business loans. 

The rule, which the Bureau issued in March, would implement Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act by requiring lenders to annually report data on credit applications to help the Bureau better understand the financing needs of small businesses owned by women and minorities and identify possible discrimination to facilitate the enforcement of fair lending laws. 

This week, Republicans moved to advance S.J.Res.32, a joint resolution that would nullify the CFPB’s final small business lending rule, led by Senator John Kennedy (R-LA). The resolution passed in the Senate in October by a 53-44 vote.

The bill passed the House by 221-202, largely along party lines this morning. Democrats including Ranking Member Waters, and Representatives Velasquez and Rashida Tlaib (D-MI) passionately defended the rule on the House floor ahead of the vote. President Biden has vowed to veto the bill. 

House Budget Assesses a Fiscal Commission

On Wednesday, the House Budget Committee held a hearing titled: “Examining the Need for a Fiscal Commission Reviewing H.R. 710, H.R. 5779, and S. 3262.” This hearing intended to assess proposed legislation for the creation of a fiscal commission and brought together sponsors for the following bills: 

Although members present gave brief descriptions of the details of their specific proposals, most of the conversation focused on the debate surrounding the necessity of a fiscal commission in the first place. Democrats like House Budget Committee Ranking Member Brendan Boyle (D-PA) and witness Representative Jim McGovern (D-MA) emphasized their skepticism about a commission that would focus on cutting important entitlement benefits and ignore opportunities to solve the debt crisis through raising revenues. Although the bipartisan proposals claim to be putting “every option on the table,” McGovern noted that many Republican members have made pledges against any type of tax increase, discounting its viability.

Bipartisan sponsors of the three proposals noted the upcoming insolvency of Entitlement Trust Funds:

  • The Social Security Trust Fund is expected to reach insolvency in 2033/2034, resulting in a 23 percent cut to benefits. 
  • Medicare Part A is expected to reach insolvency in 2031, resulting in an 11 percent cut to benefits. 

They argued that the status quo is that entitlement benefits will be cut within the next 10 years, so action taken now, even if it leads to cuts in benefits, will be positive for the millions of Americans who rely on important social programs. 

With the introduction of the Fiscal Stability Act of 2023 in the Senate, a companion bill to the Fiscal Commission Act of 2023 in the House, we can expect that this idea will move forward. The proposal may be included in future appropriations legislation that will need to be passed in January and February. 

Look Ahead

Tuesday, December 5

Wednesday, December 6

Friday, December 8

  • November Jobs report