Update 814: Shutdown Averted, Inflation Abates, Week’s News

Update 814 — Biden Signs 3-Mo FY25 CR;
August PCE Drops to 2.2%, Leading Week

This week, right before the start of the 2025 fiscal year, Congress approved and the President signed a continuing resolution (CR) allowing the federal government to remain open, with spending held constant at last year’s level until December 20, putting off a decision on a 2025 federal budget until after the November elections.

Members now head home to campaign, against the backdrop of an economy seeing continuing disinflation, with personal consumption expenditure (PCE) figures out today showing a mere 2.2 percent gain last month— the lowest in over 40 months. We cover the budget, inflation news, a new proposed rule from the Biden administration, and a review of the key economic policy hearings in Congress this week, below. 

Good weekends, all…

Best,

Dana


Headline

House and Senate Approve, Biden Signs, Clean CR

This week, Congress headed out early for its pre-election recess after taking action on government funding ahead of the new fiscal year (FY25) beginning next Tuesday, October 1. Following a failed vote for a partisan spending measure in the House last week, the two chambers of Congress moved expeditiously this week and Wednesday passed a clean Continuing Resolution (CR) that will temporarily fund the government until December 20. Despite opposition from hard-line conservatives and Republican Presidential nominee Donald Trump, the measure cleared the House 341-82 and the Senate 78-18, notably with unanimous Democratic support. The President signed the CR into law last night, staving off the possibility of a government shutdown for three more months. 

The bipartisan, clean CR includes the three-month timetable many members were pushing for. The bill also allocates $231 million in funding to the Secret Service in response to recent assassination attempts on former President Trump and extends replacement benefits for SNAP recipients who have had their benefits stolen through skimming – a technique in which criminals copy EBT card information at points of purchase. 

Omitted from the CR is additional funding the Biden administration requested for:

  • Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) 
  • Social Security Administration
  • Department of Veterans Affairs (Congress passed a supplemental last week to partially address this need)
  • Disaster Relief Fund/FEMA (The CR does allow FEMA to spend temporary funding at whatever rate they need, but does not specifically allocate additional funds beyond FY24 levels) 
  • Navy’s Virginia-class Submarine Program 

This stop-gap funding measure is a significant departure from Speaker of the House Mike Johnson’s (R-LA) “Plan A,” which included a six-month timetable and a rider that would add proof of citizenship requirements for voting in the SAVE Act. These demands, pushed for by Trump and the right wing of the GOP, proved difficult to garner support for even among the GOP-led House, culminating in a failed vote on the House floor last week (202-220 vote). 

House Republicans had a myriad of disputes with Johnson’s “Plan A” approach — some worried about spurring a shutdown before this year’s elections, others were keen to complete work on FY25 and leave the next Congress with a clean slate. It also quickly became clear that the Senate and President Biden would reject Johnson’s proposal after its introduction, but the Speaker pushed forward in the hopes that a failed vote would afford him the necessary cover to pivot towards a passable, bipartisan stopgap. Still, this didn’t stop Trump from reportedly trying to build support for an alternative approach this past week, which would likely drop the six-month timetable but not the SAVE Act. 

Congress will return on November 12 after its pre-election recess, giving members about five legislative weeks thereafter to take action on final funding bills. Though Appropriators usually opt to adopt spending packages, otherwise known as “buses,” when faced with a funding deadline so close to the winter holidays, Speaker Johnson has vowed to oppose such a measure, as “omnis” often leave members with little time to review the underlying policy. While his omni-opposition may draw favor with his Republican colleagues, it will likely make reconciling the differences between House and Senate proposals much more difficult to do before the shutdown deadline of December 20. 

Congressional staff will continue to work on negotiating final legislation ahead of the lame-duck session post-elections, but final plans are likely to hinge on the outcome of the election. Despite this lack of clarity, there are limited options available for Congress, namely, to:

  • punt final funding using another CR,
  • pass full-year bills individually or using mini/mega-buses or an omnibus, or
  • send the government into a partial/full shutdown. 

Other Developments

Inflation Falls to 2.2% In August

The Federal Reserve’s preferred measure of inflation, the personal consumption expenditures (PCE) price index, rose by 2.2 percent on an annualized basis in August, down from an annualized increase of 2.5 percent in July. Inflation as measured by PCE has now fallen to its lowest level since February 2021 and is nearing the Fed’s target of two percent. This is according to the August PCE report released by the Bureau of Economic Analysis released this morning. On net, the prices of goods actually decreased by 0.2 percent in August. Prices for services went in the opposite direction, growing by 0.2 percent. 

Core PCE – which strips out food and energy prices – rose by 2.7 percent on a year-on-year basis last month, slightly up from the 2.6 percent year-on-year increases in core PCE in both June and July. 

Source: Council of Economic Advisers

Headline PCE rose by just 0.1 percent on a monthly basis in August, slightly down from the 0.2 percent increase in prices on a monthly basis in July. The price increases over the past few months are notably down from those seen in the first four months of this year when prices rose by 0.3 percent in April, February, and March respectively, and by 0.4 percent in January. Core PCE, meanwhile, rose on a monthly basis by 0.1 percent last month, slightly down from the 0.2 percent month-on-month increases in June and July. 

The overall 0.1 percent increase in prices in August came as prices for goods fell by 0.2 percent and prices for services rose by the same margin. Energy prices fell by 0.8 percent while food prices rose by 0.1 percent on a monthly basis last month. 

With inflation nearly at the Fed’s target of two percent and continuing to trend down, the Fed is more inclined to continue cutting interest rates aggressively. Earlier this month, the Fed cut interest rates by 50 basis points after holding rates at the 5.25 to 5.5 percent range. The Fed’s rate-setting committee, the Federal Open Market Committee (FOMC), will meet next on November 6 and 7. 

U.S. Economy Grows by Strong 3% in Second Quarter 

The United States economy grew by 3.0 percent on an annualized basis in the second quarter of 2024 according to the third estimate released by the Bureau of Economic Analysis (BEA) yesterday. This rate of growth is on par with second quarter GDP growth estimated in the BEA’s second estimate released late last month. The third and final estimate of GDP for the second quarter is based on more complete data. 

The second quarter growth figure is a robust rebound after the American economy grew by 1.4 percent in the first quarter of this year, surpassing the remarkably strong 2.5 percent growth in 2023. GDP growth over April, May, and June was driven by increases in consumer spending, private inventory investment, and nonresidential fixed investment over this period. Consumer spending, the primary driver of growth last quarter, increased by 2.8 percent.

The economy’s impressive GDP growth, bolstered by strong consumer spending, shows that the American economy remains resilient in the face of the elevated interest rate environment of the last several years. As the Federal Reserve begins bringing rates down, interest-rate-sensitive sectors like housing and manufacturing may pick up in coming quarters. The advanced estimate of GDP for the third quarter will be released on October 30. 

Biden Administration Seeks to Ban Chinese Auto Tech

Earlier this week, the Department of Commerce issued a proposed rulemaking to ban the import or sale of internet-connected vehicles in the United States equipped with certain hardware and software from enterprises “with a sufficient nexus” to the People’s Republic of China or Russia. An investigation found that such technologies present a risk to American infrastructure and to the privacy of American drivers. Citing these national security concerns, the proposed rule would also prohibit such hardware or software from being sold separately and prohibit American manufacturers from producing vehicles with these technologies. 

This announcement comes as a continuation of an increasingly protectionist stance by the Biden-Harris administration against Chinese disruptions in American markets. Earlier this year, the Biden administration announced a 100 percent tariff on Chinese electric vehicles and just last week, proposed a rule to close the de minimis trade loophole on small value goods from entering the United States without duties, taking particular aim at Chinese-founded e-commerce platforms. 

Hearings

Senate Budget Committee Debates Housing Affordability

On Wednesday, the Senate Budget Committee held a hearing about how Congress should address the housing crisis. The hearing quickly became a back-and-forth about the Biden Administration’s track record on housing, as well as the housing policies of presidential nominees Kamala Harris and Donald Trump. The Republican members, led by Ranking Member Chuck Grassley (R-IA), spoke about how much home prices and rent have risen over the last four years. In particular, they blamed President Biden’s spending policies for raising inflation, resulting in the Fed raising interest rates and mortgage rates going up. They also criticized Harris’ housing policy proposals as economically unsound, particularly her previous calls for rent control.

The Democrats, led by Chair Sheldon Whitehouse (D-RI) praised President Biden’s actions on housing, such as the housing provisions in the American Rescue Plan, while also stressing that the federal government can and should do more to support housing development. Notably, Rhode Island Speaker of the House Joseph Shekarchi was called to testify as a witness. Shekarchi spoke about how Rhode Island, a small and densely populated state with an aging housing stock, worked to address its housing crisis. Rhode Island passed 50 new housing laws in 4 years, with much of the legislation focused on reducing barriers to development, red tape, and redundancy. Shekarchi called on Congress to address the housing crisis by passing legislation on:

  • down payment support,
  • rental assistance, and 
  • support for housing construction.

HFSC Financial Institutions Subcmte. on Basel III/Endgame 

On Wednesday, the House Financial Services Committee Financial Institutions and Monetary Policy Subcommittee convened for a hearing during which the Subcommittee members once again targeted federal regulators’ Basel III Endgame proposal. 

The Basel III Endgame proposal – jointly put forward by the Fed, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) last July – required stricter capital requirements on banking firms with $100 billion or more in total assets and firms that engage in significant trading activities. The original proposal would have effectively increased capital requirements by 19 percent for the eight U.S. Global Systemically Important Banks (G-SIBs). Earlier this month, Federal Reserve Vice Chair of Supervision Michael Barr outlined plans to significantly roll back the proposal’s capital requirement. Vice Chair of Supervision Barr said that following his recommended adjustments, aggregate common equity tier 1 capital requirements for G-SIBs would instead increase by 9 percent. The Basel III Endgame proposed rule would also increase capital requirements for large banks that are not G-SIBs.

Subcommittee Chair Andy Barr (R-KY) – who has pushed against the stronger standards for banks since the Basel III Endgame proposal was first put forward – said that he believes recommended roll backs don’t go far enough, saying “While some of the previewed changes are encouraging, Barr’s speech suggests that considerable work still remains, particularly to the market risk component of the Endgame proposal.” Subcommittee Republicans largely agreed and called for the federal banking regulators to chip away even more at the proposal.

Wednesday’s hearing was premature in that the text outlining specific changes under the re-proposal have yet to be published and represented yet another attempt to weaken and delay the implementation of a rule to ultimately strengthen the resilience of the financial system. 

Gensler: SEC Waiting on Fed re Exec. Comp. Rule

On Tuesday, all five Commissioners heading the Securities and Exchange Commission (SEC) appeared before the House Financial Services Committee at a hearing focused on oversight of the agency. Among the broad range of issues discussed was the SEC’s failure to join other federal agencies in proposing a long-overdue rule to ban executive compensation plans that incentivize inappropriate risk-taking at financial institutions in May. 

After the 2008 financial crisis, Congress mandated that bank executives’ compensation packages not incentivize them to make reckless decisions that could risk the safety and soundness of the firms they lead. Section 956 of the Dodd-Frank Act required that six federal regulators, including the SEC, jointly prescribe regulations or guidelines banning executive compensation packages that incentivize this recklessness by a 2011 deadline. In May, four of the six agencies – the Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), National Credit Union Administration (NCUA), and Federal Housing Finance Agency (FHFA) – proposed a rule to finally implement the long-overdue ban. Notably, the SEC and Federal Reserve did not move forward with the other four agencies. 

Responding to questions by Representative Nydia Velázquez (D-NY), SEC Chair Gary Gensler said that he is supportive of the rule, but that the Federal Reserve has told the SEC at both the staff and Chair levels it is not ready to move forward with the rule and the SEC has thus chosen to allocate its resources elsewhere. Gensler said, “We need the Federal Reserve. If they’re ready, we’ll be ready.” The Fed has continued to resist fulfilling its Congressional mandate by joining other agencies on an executive compensation rule. 20/20 Vision continues to call on the Fed to move forward on this rule as Congress mandated. 

Senate HELP Discusses Preparing Workers for AI

On Wednesday, the Senate HELP Committee’s Subcommittee on Employment and Workplace Safety held a hearing focused on how to properly prepare the American workforce for the adoption of AI. As pointed out by Chair John Hickenlooper (D-CO), AI is no longer a prospective technology, but one that is seeing rapid adoption in the workplace. Around 60 percent of American businesses are looking at adopting generative AI. He stressed that AI has the potential to greatly benefit employers and employees alike, but that optimism needs to be tempered with the duty to prepare both current workers and future workers with AI literacy to take advantage of this technology. Ranking Member Mike Braun (R-IN) and the other Republican members were largely in agreement, stating that AI innovation should not be smothered with regulations, but at the same time, workers need to be prepared for AI.

The experts brought in as witnesses reiterated the fact that AI is changing the workplace at a rapid pace and workers need to be prepared for these changes. AI is shifting the types of skills needed to succeed in one’s career while making some positions entirely obsolete. To prepare for the AI-driven labor market, students need to be trained in how to use AI as part of their educations while current workers need to be upskilled with the technology. This will involve introducing AI education to the school system, colleges, and education paths that cater disproportionately to people from socially and economically disadvantaged backgrounds such as community colleges. Additionally, Congress should support efforts to encourage employers to upskill their workers and other legislation that will help both employers and employees navigate the AI landscape.