Update 792 – Biden’s Debate Performance
Raises Questions, Leading Week’s Roundup
President Biden’s halting performance in last night’s debate, including several gaffes and his inability to counter Donald Trump’s relentless lying and present a clear vision of where he seeks to lead the nation, has raised questions from agonized Democrats about his candidacy for re-election. Trump also failed to take advantage of the spotlight, dodging nearly every question and instead offering a stream of untruths, but Biden responded with incredulity more than cogent rejoinders.
The week included several other developments that were obscured by the debate, including a key inflation reading for May, Supreme Court rulings overturning the Chevron administrating-agency deference precedent, and the SEC’s use of administrative law judges to deprive plaintiffs of trial by jury, as well as the results of the Fed’s annual stress tests for banks. We review the foregoing below.
Good weekends, all…
Best,
Dana
Headline
Postscript on the Debate
Following last night’s debate, many Democrats today are in understandable alarm about President Biden’s candidacy and their own fortunes, but the truth remains that only Biden himself can answer those concerns. There is still time for him to recapture the clarity and energy of his State of the Union address in his nomination speech at the August convention and the second presidential debate scheduled for September. Biden has beaten Trump and it is up to him to convince voters that he is up to doing so again.
His fiery speech this afternoon in North Carolina was encouraging. The post-debate polling of voters, the response of Democratic electeds and officials, and fundraising by donors may make clear that one night’s performance does not a campaign make.
The truth regarding Biden’s economic record, which is our remit here, faces a challenge of popular sentiment, but has been strong and he will undoubtedly continue pushing for the wealthy to pay their fair share, holding corporations accountable, and fighting to lower costs for American families in a second term. A sober assessment of the Trump economy and his promises to double down on policies from taxes to tariffs will cast a harsh light on the former president if voters can resist Trump’s revisionism.
Moreover, the world-beating American economic recovery from the pandemic — the 15 million jobs created, the longest stretch of low unemployment in 50 years, the wage gains that have outpaced inflation, all points Biden made in the debate — as well as Biden’s ability to enact transformational legislation that enabled the recovery, can still convince base and the remaining swing voters.
Other Developments
SCOTUS Strikes Down the Chevron Deference
In the cases of Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. Department of Commerce, the Supreme Court ruled 6-3 to strike down the decades-old Chevron Deference. The Chevron Deference, as established in Chevron USA v. Natural Resources Defense Council in 1984, established that if there is ambiguity in a given statute established by Congress, a court must defer to the relevant regulatory agency’s interpretation of the statute provided that their interpretation is not unreasonable. For four decades, the Chevron Deference empowered federal regulatory agencies to fill in the gaps in congressional statutes, giving them much-needed flexibility to establish regulations in important policy areas such as environmental protections and healthcare. The Chevron Deference was a key fixture in regulatory law, with 70 Supreme Court decisions and 17,000 lower court decisions relying on the deference.
Writing for the conservative justices, Chief Justice Roberts stated that with these decisions, the court was finally ending “our 40-year misadventure with Chevron Deference.” Roberts stated that “the reviewing court – not the agency whose action it reviews – is to decide all relevant questions of law and interpret … statutory provisions.” Roberts also criticized the deference as “unworkable” and claimed that it allowed federal agencies to change course even without direction from Congress. The court’s three liberal justices all dissented, with Justice Kagan warning that the majority had turned SCOTUS into “the country’s administrative czar” and that “a rule of judicial humility gives way to a rule of judicial hubris.” The rulings are a huge win for conservatives, who have long seen Chevron as an obstacle in the way of their crusade to roll back the federal regulatory apparatus further. This ruling has broad ramifications, and we plan on exploring them in our update next week.
SCOTUS Limits SEC’s Ability to Enforce Securities Laws
In the case of SEC v Jarkesy, the Supreme Court ruled in a 6-3 decision to limit the power of the SEC to enforce securities laws through the use of in-house tribunals adjudicated by administrative law judges (ALJs). The SEC and several other federal agencies make use of ALJs in their proceedings, ranging from hearings on benefits disputes with the Social Security Administration to pursuing penalties against bad actors with the SEC. In this particular case, an SEC ALJ found that two hedge funds established by George Jarkesy committed securities fraud against investors and fined Jarkesy and other parties $300,000. Jarkesy’s lawyers said that since Jarkesy had not been allowed a jury trial, his Seventh Amendment right to a jury trial had been violated.
Chief Justice Roberts, writing for a six-person majority comprising all of the conservative justices, ruled in favor of Jarkesy, stating that “a defendant facing a fraud suit has the right to be tried by a jury of his peers before a neutral adjudicator.” Chief Justice Roberts further stated that “Rather than recognize that right, the dissent would permit Congress to concentrate the roles of prosecutor, judge, and jury in the hands of the Executive Branch. That is the very opposite of the separation of powers that the Constitution demands.” The decision invalidated the SEC’s use of ALJs and likely opened up challenges to the constitutionality of ALJs used by other important regulatory agencies, such as the National Labor Relations Board, the IRS, and the EPA. The decision represents a win for conservatives looking to curtain the federal regulatory apparatus, as it weakens the SEC’s ability to go after bad actors and requires them to pursue penalties against them through Article III courts.
House Makes Progress on FY25 Funding Legislation
This week, the House continued work towards its ambitious goal of passing all government spending bills before the lengthy August recess. Funding bills for Defense, Homeland Security, and State and Foreign Operations (SFO), which previously cleared their respective Appropriations subcommittees, saw extensive debate on the House floor with over 300 amendments up for consideration. Ultimately, these bills passed votes on the House floor but would surely fail in the Senate in their current form.
While Republicans have remained united on spending measures to this point, we saw last year how the policy and funding components of the more controversial bills fuel division, even among the House GOP majority. Four of these more controversial bills went through the subcommittee markup process this week and are scheduled for a full House Appropriations Committee markup in July:
- Transportation, Housing, and Urban Development (T-HUD)
- Labor, Health and Human Services, and Education (Labor-HHS)
- Commerce, Justice, and Science (CJS)
- Interior and the Environment
All four bills are chalked full of harmful policy riders – also known as “poison pill” provisions – which target a wide variety of issues ranging from racial equity and abortion to antitrust enforcement.
Given our focus on antitrust, we are particularly concerned about language in the CJS appropriations bill that would harm the Department of Justice’s Antitrust Division’s ability to effectively engage in antitrust enforcement to the extent that it has in recent years and may need to in order to effectively challenge upcoming merger proposals. The bill would reduce the division’s funding from roughly $233 million to about $192.8 million (by $40.2 million), limit the division’s ability to hire additional staff, collaborate with international enforcers, and implement the new 2023 Merger Guidelines.
None of the extreme House bills can make it past the Senate and the President’s desk as they stand, and we will surely see extensive debate and negotiations among House and Senate appropriators before final passage. The Senate is behind in the appropriations process but will likely decide on top-line funding levels for defense and non-defense discretionary spending (NDD) – otherwise known as 302(a)s – in the coming weeks. At this point, we will have a better sense of the daylight between the two chambers’ proposals and what to expect for the remainder of the FY25 funding process.
Core PCE Fell to Lowest Level In Three Years in May
The Federal Reserve’s preferred measure of inflation, the personal consumption expenditures (PCE) price index, rose by 2.6 percent on an annualized basis in May, down from annualized increases of 2.7 percent in each of the two months prior. Core PCE – which strips out food and energy prices – also rose by 2.6 percent on a year-on-year basis last month, falling to its lowest level since March 2021. This is according to the May PCE report released by the Bureau of Economic Analysis this morning.
Headline PCE remained flat on a monthly basis in May after rising by 0.3 percent in each of the prior three months and by 0.4 percent in January. Core PCE, meanwhile, rose by just 0.1 percent on a monthly basis in May, after rising by 0.3 percent on a monthly basis in each of the prior months.
Source: Council of Economic Advisers
The overall zero price increase over the month came as energy prices fell by 2.1 percent and the prices of goods fell by 0.4 percent. These price reductions offset a 0.2 percent increase in service prices and a 0.1 percent increase in food prices.
The new inflation data come roughly a month ahead of the Federal Open Market Committee’s (FOMC) next meeting to consider interest rates on July 30 and 31. Today’s good news is unlikely to incline the Committee to cut rates at long last from the 5.25 to 5.5 percent range where the Fed has held rates since last July. The June PCE report, to be released days before the next meeting, could have a much more pivotal impact on the FOMC’s decision.
U.S. GDP Grows By 1.4% in the First Quarter
The United States economy grew by 1.4 percent on an annual basis in the first quarter of 2024, according to the third estimate released by the Bureau of Economic Analysis yesterday. The third estimate is based on more complete source data than was previously available prior to advanced and second estimates of Q1 2024 GDP growth.
This revision is slightly up from the 1.3 percent increase in GDP over the quarter estimated by the Bureau in May. The very slight upward revision reflects a downward revision to imports, which are a subtraction in the calculation of GDP, and upward revisions to nonresidential fixed investment and government spending. Consumer spending, which had been a main driver of strong growth over the last year, was revised down from a previously estimated two percent to 1.5 percent over the quarter.
The American economy grew a robust 3.4 percent in the last quarter of 2023 alone and by a strong 2.5 percent over all of last year. While growth in the first quarter of 2023 fell since the previous quarter, and the last year, growth remains strong and shows that the U.S. economy is still resilient in the face of elevated interest rates.
Hearing
HFSC Focuses on Stress Tests as Fed Releases Results
On Wednesday, the House Financial Services Committee Subcommittee on Financial Institutions and Monetary Policy Subcommittee convened for a hearing focused on stress tests – annual assessments by the Federal Reserve that evaluate how large banks are likely to perform under stressful scenarios defined by the regulator.
The hearing was held on the same day the Fed released the results of its annual stress test, which showed that all 31 participating banks passed. In the 2024 supervisory severely adverse scenario:
- the unemployment rate rises to 10 percent percent
- real GDP falls by 8.5 percent, house prices fall by 36 percent
- commercial real estate prices fall by 40 percent
The Fed found that in the severely adverse scenario, the participating banks would face nearly $685 billion in losses, but would maintain common equity tier 1 (CET1) capital ratios above the required minimum regulatory levels. Banks are required to show that they can stay above the required 4.5 percent minimum capital ratio under the most stressful situation posed by the Fed.
Subcommittee Chair Andy Barr (R-KY) called for more transparency in stress tests. In 2019, the Federal Reserve took steps to make stress tests more transparent by providing more details to banks about the models they use in evaluations. This allowed banks effectively to reverse-engineer stress tests by restructuring their balance sheets to ensure they pass, without actually reducing risk. Stress tests should be adjusted to make it more difficult for banks to game the system.
Barr highlighted his Bank Resilience and Regulatory Improvement Act which would require that the Fed disclose the underlying models and assumptions used in the stress tests and require that the Fed take public comment on each year’s stress testing scenarios. The bill would only exacerbate existing weaknesses in the current stress testing framework and further help banks game stress tests.