Update 868 – Reconciliation Halted:
House Budget Stops Massive Tax Bill
In a somewhat surprising turn of events today, the House Budget Committee rejected the GOP reconciliation blueprint, with four Republicans joining Democrats in opposition. The Republican defectors cited concerns over the proposal’s overall deficit impact, as well as delays in implementing cost-reduction measures like Medicaid work requirements. GOP leadership is open to making changes that address these concerns before floor consideration next week, but risk spooking moderates already shaky on the huge cuts to federal assistance. Speaker Johnson will have to work some legislative legerdemain if he hopes to meet his goal of passing the package out of the House before the end of next week. His next test will come Sunday at 10 p.m., when the Budget Committee is scheduled to reconsider the proposal.
This week also saw the release of new data, showing that inflation ticked down last month, just as the impact of increased tariffs begins to set in. While the U.S. and China agreed to lower tariff rates, price levels are still set to rise by 1.7 percent, an average household loss of $2,800. Walmart’s announcement that they will be raising prices due to tariffs shows this walk-back will not ease the costly pain to be felt by consumers. We cover these developments, along with relevant hearings, below.
Good weekends all,
Dana
Headline
“Big, Beautiful Bill” Stalled in House Budget
In a noteworthy defeat for Trump and GOP leadership, the House Budget Committee voted down the GOP reconciliation proposal today in a 16-21 vote. Five House Republicans voted with Democrats in opposing the measure:
- Chip Roy (R-TX)
- Ralph Norman (R-SC)
- Andrew Clyde (R-GA)
- Josh Brecheen (R-OK)
- Lloyd Smucker (R-PA) (*switched vote to no so he can motion to reconsider)
Friday’s markup was expected to be a pro forma procedural packaging of reconciliation proposals approved by 11 House committees over the past three weeks. The Committee is unable to make substantive changes to the proposal, which would have to be made by the Rules Committee before moving to a final floor vote. But yesterday, following the approvals of proposals in Ways and Means, Energy and Commerce, and Agriculture – which included massive tax breaks for the ultra-wealthy paid for by the largest cuts to Medicaid and SNAP in their history – it became clear that several Budget Republicans were willing to stall the bill over unaddressed concerns. The Budget Committee’s vote today was their first opportunity to do so.
While there are unresolved concerns from both sides of the GOP, the four Budget Republicans who broke ranks on Friday largely argued that the package did not go far enough in terms of spending cuts and deficit reduction. Specifically, members cited the fact that Medicaid work requirements don’t kick in until 2029 – just one example of the bill frontloading costs (like tax breaks) while deferring the offsetting cuts. In a similar objection, Rep. Brecheen focused his opposition on the delay of the repeal of IRA green energy tax credits in the Ways and Means title. House Majority Whip Steve Scalise (R-LA) has suggested that leadership is seriously considering accelerating the timeline for Medicaid work requirements, though a formal agreement is still outstanding.
Now, GOP leadership is seemingly left between a rock and a hard place. Moderates were already uneasy with the large cuts included in the package, with some noting that it would severely hurt their chances of reelection in next year’s midterms. Additionally, SALT moderates – whose priority is increasing the State and Local Tax (SALT) deduction – are still negotiating with leadership on raising the $30,000 cap approved in the Ways and Means proposal ahead of a final vote. And this reform is likely to be extremely expensive. To state the obvious, changes that members on both sides of the Republican party are demanding in exchange for their support may very well be irreconcilable.
The road ahead on reconciliation remains in question, but the House Budget Committee will reconvene on Sunday at 10 p.m. for another vote on the package. Republicans are still hoping to move it out of the House by the end of next week in advance of the Memorial Day recess, but this would require swift and significant progress on the negotiation front. For now, the delay of this package, which would cripple federal healthcare and nutrition assistance programs in the name of tax breaks for the wealthy, should be viewed as a temporary reprieve for the American people.
Other Developments
CPI Inflation Ticks Down to 2.3% in April; Tariff-Driven Cost Hikes Seen Just Ahead
Inflation as measured by the Consumer Price Index (CPI) cooled notably in April as President Trump’s tariffs on China and the rest of the world threaten to upend years of progress, just as inflation edges toward the Federal Reserve’s two percent target.
Prices rose by 0.2 percent on a monthly basis and by 2.3 percent on an annualized basis in April, according to the April CPI report released by the Bureau of Labor Statistics on Tuesday. This is the smallest annualized increase in headline CPI since February 2021. Core CPI – which excludes food and energy prices – rose by 0.2 percent on a monthly basis and by 2.8 percent on an annualized basis. This is in line with the 2.8 percent year-on-year increase in core CPI in March.
The new inflation data reflects the very early impact of the Trump administration’s sweeping tariffs announced in early April. The tame inflation data may be due to businesses having built up their inventories prior to the implementation of tariffs and tariffs on intermediate goods, those which are inputs into final goods, taking time to pass through. Inflation is expected to rise in the coming months, given the scope and scale of tariffs. The full impact of tariffs will take time to become visible in inflation data and may not become clear until late this summer.
Food prices fell by 0.1 percent on a monthly basis in April, with grocery prices falling by 0.4 percent over the month, the largest decline in that index since September 2020. This was driven primarily by a 12.7 percent decrease in egg prices. Prices of food away from home rose by 0.4 percent on a monthly basis.
Meanwhile, energy prices rose by 0.7 percent on a monthly basis in April. A 3.7 percent increase in gasoline prices and a 0.8 percent increase in electricity prices more than offset the 0.1 percent decrease in gasoline prices last month. Airline fares fell by 2.8 percent last month, after declining 5.3 percent in March, a sign that consumers may be beginning to reduce their spending.
The new inflation data comes over a month ahead of the Federal Open Market Committee’s (FOMC) next meeting, during which it will decide the future level of interest rates. Committee officials opted to hold interest rates steady at the 4.25 to 4.5 percent range at their meeting last week and are monitoring the impact of the Trump administration’s trade, immigration, fiscal, and regulatory policy changes before they determine the path forward. The Committee will meet next on June 17 and 18.
Unrelenting Uncertainty Amid 90-Day Tariff Reprieve
Last weekend, Treasury Secretary Scott Bessent and USTR Jamieson Greer met with their Chinese counterparts in Switzerland to start negotiations amid sky-high tariffs and a brewing trade war. While expectations for a meaningful deal were low, the resulting drop in tariff rates surprised the world, featuring the following developments from the weekend:
- the U.S. lowered tariff rates from 145 percent to 30 percent (accounting for the 10 percent across the board tariff with the 20 percent fentanyl-related tariff rate, but could be much higher with tariff stacking) on Chinese imports, while China agreed to drop their rates from 125 to 10 percent for 90 days,
- China lifted export controls on 28 U.S. entities and 17 countries have been removed from the Unreliable Entity List,
- and the U.S. brought the de minimis rate – a duty for packages worth less than $800 – down from 120 percent to 54 percent or $100 per package. Pre-Trump, these lower-cost items were imported duty free.
The only “deals” announced to date – with the U.K. and China – lead analysts to believe the adjusted rates of 10 percent and 30 percent, respectively, may serve as functional bookends defining the range of possible outcomes for other countries. Head of FX research, George Saravelos of Deutsche Bank, points out, “The UK has one of the least imbalanced relationships with the US and now has a universal tariff rate of 10%. China has one of the most imbalanced relationships and now has a tariff rate of 30%.”
Trading routes will be strained as importers who delayed their orders and waited out the high tariffs fulfill their orders. The surge in shipments relieves pent-up demand, but questions remain around how supply chains will handle this shock.
Just this week, Walmart announced it will soon raise prices because of Trump’s tariffs, a worrying development for consumers as retailers begin to face tightening bottom lines due to higher import costs. The Yale Budget Lab found that with the lower tariffs that remain in place through May 12, price levels are nevertheless set to rise by 1.7 percent, which would mean an average household loss of $2,800. Apparel and textiles are disproportionately affected by tariffs on China, which could mean a 15 percent higher price for shoes and a 14 percent increase in apparel costs. While the S&P and dollar have soared with the news, GDP growth is expected to fall 0.7 percentage points and unemployment is set to shrink by 0.4 percent.
Pressure came from all sides for the President to ease tariff rates with China. The business community and investor markets were reeling with uncertainty, while consumer concerns created political risks for the President and the Republican Party. Touting a “deal” may save the President some political ground, but the remaining tariff rates and general uncertainty have consequences.
Critically, none of the underlying issues the U.S. has with China in their tenuous trading relationship have been addressed, such as Chinese subsidies. This fact raises concerns about what lies ahead within the next 90 days and when the pause ends.
The administration is finally acknowledging the impossibility of negotiating trade deals with nearly all of our trading partners. On Friday, the President announced that countries will soon receive a letter from the U.S., which includes what their new tariff rate will be, citing an obvious capacity issue.
A Compromise on the GENIUS Act?
On Thursday, Senate Majority Leader Thune (D-SD) filed cloture on the motion to proceed with the GENIUS Act, the first major piece of legislation on cryptocurrency this Congress that failed its cloture vote last week by a sizable margin. This would set up a new cloture vote for early next week and would indicate that Thune feels progress has been made in winning over pro-crypto Democrats. Punchbowl News published a memo last week from the Senate’s pro-crypto Democrats, who praised what they claimed were major wins for the Democrats, such as prohibitions on the ownership of stablecoins by large public tech companies and bolstered ethics requirements and conflict of interest standards.
Perhaps not surprisingly, Senate Banking Committee Ranking Member Elizabeth Warren (D-MA) was not impressed, releasing her own memo suggesting that the concessions made by Republicans were more symbolic than anything else. The state of play will become clearer once Democrats have finished reading the bill’s revised text, but as it stands, pro-crypto Democrats such as Senator Angela Alsobrooks (D-MD), who cosponsored the bill, are trying to get their caucus on board with the legislation. The other Democrats who voted the GENIUS Act out of committee were Senators Gallego (D-AZ), Warner (D-VA), Kim (D-NJ), and Rochester (D-DE), who will be the ones to watch to see if the rewrite is enough to get the bill through the Senate.
Confirmations
Janet Dhillon to be Director of the PBGC, Senate HELP
On Thursday, the Senate Health, Education, Labor, and Pensions Committee voted 12-11 along party lines to advance Janet Dhillon’s nomination for director of the Pension Benefit Guaranty Corporation to the Senate floor. In this role, she would be in charge of overseeing the pension benefits of tens of millions of private sector workers.
While Senator Bernie Sanders (I-VT) was not present at the vote, instead voting by proxy, he had previously made clear his opposition to Dhillon’s confirmation as she served as legal counsel to companies such as US Airways that had deprived their workers of their promised pension benefits. The rest of the Committee Democrats had similar reservations, hence the fact that none of them voted to advance her nomination.
Hearings
HFSC Financial Institutions Subcmte on Bank Mergers
The House Financial Services Subcommittee on Financial Institutions convened on Wednesday for a hearing in which it discussed bank mergers and the formation of new banks, along with several Republican-led pieces of legislation seeking to weaken the bank merger approval process.
Subcommittee Chair Andy Barr (R-KY) committed to continue pushing a Congressional Review Act (CRA) resolution he introduced to overturn the Office of the Comptroller of Currency’s rule, preventing proposed bank mergers from being automatically approved after the 15th day after the close of the public comment period if the agency failed to approve the merger or otherwise act. The rule has already been rescinded by the OCC, but Barr is calling for a floor vote on the resolution, which has passed the Senate, to block any similar rule from ever being finalized.
As Ranking Member Maxine Waters (D-CA) noted, the hearing comes only a month after Capital One’s $35 billion acquisition of Discover was approved. The merger would make Capital One the nation’s eighth largest bank. The current process through which bank mergers are approved is outdated and has led to too-big-to-fail banks becoming even further consolidated in recent years.
HFSC Task Force re Boositing Treasury Market Resilience
The House Financial Services Task Force on Monetary Policy, Treasury Market Resilience, and Economic Prosperity convened on Thursday for a hearing in which members examined volatility within the U.S. Treasury market during recent periods of stress, particularly following the announcement of the Trump administration’s sweeping tariffs last month. The hearing also discussed potential changes to shore up the resilience of the U.S. Treasury market amidst uncertainty driven by the Trump administration’s shifting economic policy and growing Treasury market debt.
In 2023, the Securities and Exchange Commission (SEC) voted to mandate central clearing for cash transactions and repurchase agreements involving most U.S. Treasuries. As former SEC Chair Gary Gensler has said, the rule would reduce settlement and operational risk. Task Force Chair Frank Lucas (R-OK) and Ranking Member Juan Vargas (D-CA) both discussed the need for smooth implementation. All witnesses agreed that central clearing is foundationally important and can be helpful in promoting greater Treasury market stability, with runway for effective implementation being a key concern.
The SEC’s central clearing rule is set to be implemented in phases, with covered clearing agencies being required to implement enhanced practices by September (an extension from the original March 2025 deadline). Task Force Chair Luca said he will continue working with the SEC to ensure the rollout of the rule is smooth.
Financing Manufacturing/Industrial Boom, Senate Small Bus.
In a fairly low-key affair, the Senate Small Business Committee held a hearing about the role that small businesses play in American manufacturing. Chairwoman Joni Ernst (R-IA) started by repeating the Trump administration’s rhetoric about trade deficits and the offshoring of critical goods production, crediting Trump with a boom in US manufacturing and calling for the US government to get out of the way of small manufacturers. Ranking Member Markey (D-MA) countered by pointing to Trump’s “disastrous, destructive, small-business destroying tariffs” while praising the previous work on manufacturing carried out by the Biden administration. Other than that, however, the hearing proceeded with little drama as Democrats and Republicans stressed their party’s support for small businesses.
Look Ahead
Sunday, May 18
Tuesday, May 20
Wednesday, May 21
- House Energy and Commerce Hearing: Examining Ways to Enhance Our Domestic Critical Mineral Supply Chains