Ukraine
For another week the headline risk and the global risk will be the Russian war in Ukraine. Global companies continue their exodus from Russia, and Ukraine continues to fight the good fight against the Russian invaders. Last week the US Congress approved nearly $14B in aid for both military and humanitarian purposes. NATO looks for ways to help Ukraine without broadening the war effort and creating a war between the West and Russia. It is clearly a delicate path.
In my experience working on public policy issues, when one needs to get an actor to change course a primary policy option is to find an exit policy to allow for policy change. This week the world will be looking for some possible exit policy for both Putin, and also Ukraine.
Two unlikely intermediaries may be China and Israel. Israeli Prime Minister Bennett has traveled to Moscow and has been in contact with Ukrainian President Zelensky. China, with its 2500 mile border with Russia, and broad trading relations with both Russia and Ukraine, would like to see an end to the conflict. Israel has many citizens of Russian and Ukrainian heritage and would like to play a role in resolving the conflict. There have been some reports of progress in the talks between Russia and Ukraine, and the search for an elusive exit strategy will continue and markets will be following every development.
Fed
After weeks of anticipation the Fed’s Federal Open Markets Committee (FOMC) meets this week on Tuesday and Wednesday, and on Wednesday Chair Powell will hold his regular press conference and announce the 25bps increase in the base lending rate.
Powell has had a policy of sending pretty clear signals as to his thinking on rates; and I would expect that he will telegraph what the view of the FOMC is on the course of future rate increases. Obviously, the war in Ukraine will serve as a backdrop for economic policy as the Fed navigates a tricky course between inflation and economic dislocations caused by the war and boycotting of Russian oil, gas, and raw materials.
US Government Budget
Last week Congress finally enacted a budget for Fiscal Year 2022 which began on October 1, 2021 and runs until October 1, 2022. The legislation was bipartisan and made important policy decisions that will put the stamp of the new administration on the government. In the House the bill passed 260/171 and in the Senate 68/31.
Why is this so important? Congress has had a tougher and tougher time finding consensus on the annual budget, and most years new budgets are delayed for months and the government avoids a shutdown by operating on a CR (continuing resolution) that keeps all funding constant at the prior year’s levels. Passing a timely budget in an election year is even more problematic. What this bill does is to raise spending levels and adjust spending priorities across the board. These new higher spending levels will be incorporated in any CR Congress needs to pass at the end of September in order to avoid a government shutdown on October 1.
The budget gave both sides important policy points. Republicans and many Democrats believed that there needed to be a substantial increase in defense spending. The entire budget had been frozen at the level established in 2020 as the government operated under a Continuing Resolution (CR) since the new fiscal year began on October 1, 2021. Rapidly changing developments in relations with both Russia and China created a sense of urgency to increase and reallocate defense spending. The budget approved last week increased defense spending by 5.6% or $42B.
In order to bring Democrats on board there needed to be parity between defense spending and non-defense programs. Hence, the budget included a $46B increase for non-defense programs including money to fund the bipartisan infrastructure bill Congress had approved earlier in the year. Democrats objected to the way the bill funded $15B in Covid funding for therapeutics, testing, and vaccines and this money was dropped from the final bill. However, both sides agreed to include $14B in money for Ukraine. House Democrats will try to resurrect money for Covid but getting it through the 50/50 Senate will be tough.
