What SCOTUS, Regulators Will Return To In January

Update 743 — January Preview, Part I:
What SCOTUS, Regulators Will Return To

The Senate remains in session, having abandoned until January negotiations on the foreign assistance supplemental requests and having extended the Federal Aviation Authorization for three months. What remains is a possible override vote on the President’s veto of a resolution passed by Congress this month to stop Dodd-Frank rule 1071 on data gathering by the CFPB, an effort likely to fail in the Senate.   

Today, we preview the key non-legislative economic policy issues coming up in January, including the oral argument before the Supreme Court in a case challenging the long-standing regulatory deference precedent known as the Chevron doctrine, and critical regulatory rule-makings with comment periods ending next month.



High Court to Hear Cases on the Chevron Doctrine

In mid-January, the Supreme Court will hear oral arguments in Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. U.S. Department of Commerce, cases challenging the 1984 precedent in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. establishing deference to regulators’ interpretation of acts of Congress where the legislative language is unclear. The Chevron doctrine has, for over forty years, guided federal agency regulation of everything from environmental matters to financial rules. 

The Chevron doctrine was established in a case concerning a dispute over the Reagan Administration EPA’s interpretation of amendments adopted in 1977 to the Clean Air Act of 1963. In its decision, the Supreme Court ruled that the EPA had the power to interpret ambiguous language in laws passed by Congress on the grounds that Congress itself effectively delegated interpretive authority to the agency to execute Congressional policy. The Court enunciated a two-step analysis in deciding whether federal agencies have such authority:

  1. The court must determine whether Congress expressed its intent in the statute and, if so, whether or not the statute’s intent is ambiguous.
  2. In examining the agency’s reasonable construction of the statute, the court must assess whether Congress’s decision to leave ambiguity or fail to include express language on a specific point was done explicitly or implicitly.

In other words, if Congress’ legislative intent in a given statute is implicitly ambiguous, the courts must defer to the agency’s interpretation of that statute so long as that interpretation passes a reasonableness test. In US v. Mead Corp. (2001), the Court added what is now known as “Step Zero” to the Chevron doctrine: before deferring to an agency’s interpretation of a statute, the Court must determine that the agency has the authority to issue binding legal rules on the matter; if not, then Chevron does not apply.

Since its establishment, the Chevron doctrine has become a crucial element of federal regulatory law, reinforced in a panoply of federal cases. As of June 2023, Chevron has been cited by the Supreme Court and lower federal courts more than 18,000 times. The Chevron doctrine’s grant of broad authority to agencies circumvents the need of courts or Congress itself to intercede every time the applicable agency finds ambiguity in the language of a given statute.

Two cases up for oral argument before the Supreme Court on January 17 concern the future of Chevron

  • In Loper Bright Enterprises v. Raimondo, Loper Bright Enterprises, a herring fishing company based in New Jersey, came into conflict with the National Marine Fisheries Service (NMFS) in 2020 over a proposed rule to require fishing companies to pay for at-sea monitoring programs. Loper Bright argued that the Magnuson-Stevens Act of 1976 (MSA) did not give the NMFS explicit authority to pass such a rule, whereas the NMFS argued that it had that authority under the Chevron doctrine. The US District Court for the District of Columbia applied the Chevron doctrine; the ruling was then appealed to the D.C. Court of Appeals which upheld the ruling.

    Loper Bright appealed to the Supreme Court last November, with the Supreme Court granting cert on May 1. The Court will take up the application of Chevron and is expected either to overrule it outright or to clarify whether statutory silence regarding the payment mandate requires deference to the NMFS. 
  • Relentless, Inc. v. U.S. Department of Commerce is to be heard in tandem with Loper Bright on January 17, 2024. It is another case where a herring fishing company challenged the NMFS’ authority as interpreted under the MSA. SCOTUS is hearing the case because Justice Jackson was originally involved in the Loper Bright case when it was brought before the DC Court of Appeals prior to her appointment to the Supreme Court and has recused herself as a result. As such, the Supreme Court has also taken up the similar case so that Justice Jackson may participate in a ruling over the fate of Chevron

Three Supreme Court Justices — Neil Gorsuch, Clarence Thomas, and Samuel Alito — have indicated their desire to see Chevron overturned. If the Supreme Court decides to overturn Chevron completely instead of merely limiting it in a more narrow ruling, the consequences for America’s federal regulatory apparatus would be vast as well as vastly unclear. It would sharply curtail the authority of federal agencies to regulate on everything from greenhouse gas emissions to financial transactions, shifting the authority of interpreting ambiguity in Congressional statutes to the courts. 

Without Chevron, Congress would have an extra burden in drafting bills with sufficient technical expertise to avoid ambiguity, lest it lead to a court case where the intent of the original legislation could potentially be undermined. Overturning such an important precedent would also destabilize the courts themselves unless the Supreme Court were to articulate an alternative to the Chevron doctrine. In short, the effects of overturning Chevron would be massive, and the ramifications of doing so would likely be felt for decades to come.

Basel III Endgame and G-SIB Surcharge Comments Close 

Following turmoil in the banking sector this spring and the invocation of the systemic risk exemption to protect the stability of the broader financial system, federal banking regulators proposed a slate of reforms to shore up the resilience of the banking sector. On January 16, the comment periods on two such proposals will end. 

Basel III Endgame Proposal

The Basel III Endgame proposal – jointly put forward by the Federal Reserve (Fed), Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of Currency (OCC) in July – would enhance the financial system’s ability to withstand periods of stress like the one seen this spring following the collapse of Silicon Valley Bank. 

The proposed rule would implement the final components of the Basel III or “Basel Endgame” regulatory capital framework, the final set of reforms published by the Basel Committee on Banking Supervision in December 2017. The rule would implement stricter capital requirements on roughly 40 of the nation’s largest financial institutions and banking firms, those with $100 billion or more in total assets and firms that engage in significant trading activities.

Strong capital is crucial to strengthening the resilience of the banking system. As such, 20/20 Vision strongly supports regulators’ work towards implementing the final components of the Basel Endgame with appropriate modification. 

The banking industry and its allies have suggested that the proposal would increase the cost of lending to individuals and small businesses. While those claims may scare the public, data actually suggests that increased capital requirements promote lending. Nothing in the proposal would stop banks from providing robust lending. A reduction in lending would merely reflect a choice by banks to prioritize their profits and the interests of their shareholders over lending to the very customers targeted by their campaign.

G-SIB Surcharge Proposal

The G-SIB Surcharge proposal – published by the Fed in July – would help ensure that the largest, most interconnected U.S. banks maintain capital levels commensurate with their systemic footprint. 

The proposal would modify risk-based capital surcharges applicable to U.S. global systemically important banks (G-SIBs) by revising the Fed’s capital rules and amending the measurement and reporting of certain systemic indicators used in the G-SIB surcharge framework. The proposal would therefore make the Fed’s risk-based capital surcharge more sensitive to changes in an institution’s systemic risk profile. 

The proposed changes are necessary to strengthen the banking sector’s ability to withstand shocks and periods of stress, such as the stress seen following this spring’s failure of Silicon Valley Bank and Signature Bank. We support the proposed rule and hope to see a strong rule finalized next month. 

The Fed Revisits Rates in Late January

The Fed has raised rates eleven times from near zero in early 2022 to its current 5.25 to 5.5 percent range in its most aggressive series of interest rate hikes since the 1980s. After the Federal Open Market Committee (FOMC) decided to hold rates steady for the third consecutive time at its December meeting, a fourth pause appears to be in the cards when the FOMC meets next on January 30 and 31. 

At this stage in its cycle of rate hikes, the Fed’s decision will depend heavily on major data on growth, labor market, and inflation to be released in the interim, including:

  • 3rd Quarter 2023 Gross Domestic Product (GDP) third estimate to be released tomorrow
  • November Personal Consumption Expenditures (PCE) price index data to be released on Friday
  • December jobs report to be released on January 5
  • December Consumer Price Index (CPI) data to be released on January 11
  • 4th Quarter 2023 Gross Domestic Product (GDP) advanced estimate to be released on January 25
  • December Personal Consumption Expenditures (PCE) price index data to be released on January 26

January’s FOMC decision may give us an indicator of how long the Fed will hold interest rates steady and when they may begin cutting rates. Holding rates at an elevated level over an extended period poses additional risk for the economy, as its effects ripple through the economy on a lagging basis that is often unpredictable. Nevertheless, the Fed has so far managed to raise interest rates significantly without tipping the economy into a recession while inflation trends to the central bank’s two percent target. Evidence that the Fed will succeed in achieving the hitherto elusive soft landing — when substantial rate hikes nevertheless do not trigger a recession— may become more clear.