Deal near on Dems' bill, Fed Chair Powell waits for decision

Key Takeaways

• Democrats appear to be closing in on deal that will include a $2T Build Back Better (BBB) proposal, and secure passage of $1T bipartisan infrastructure deal.
  
• President Biden has played a key role in bringing progressive and moderate Democrats together on the deal. Progressives have had to reduce their goals to accommodate demands of moderates.
  
• Personal and corporate tax increases have been reduced with focus on surcharge on very wealthy and strengthening rules governing offshore income for US corporations.
  
• Fed: Jamming progressives on BBB may jeopardize Powell re-nomination as Administration seeks to heal wounds. Powell also victim of his own success with strong economy emerging from Covid recession.

Debt Ceiling, Budget Reconciliation, and VA Gov. Race

Over the weekend reports continue to emerge of Democratic leaders and the White House coming to an agreement on the President’s BBB domestic program that will be considered under the Budget Reconciliation process. Reconciliation allows for consideration in the Senate without the threat of a filibuster. There are reports that Democrats may try to add an increase to the debt ceiling on to the BBB Reconciliation bill.

Nationally Democrats are growing concerned that the split between moderate and progressive Democrats is resulting in no legislation passing. Most Democrats are aware that they run the risk of losing control of Congress after the 2022 elections and then the window of opportunity will pass.

Next Tuesday, November 2, is an election which could give an indication of voter sentiment. Virginia is having a gubernatorial election in a state that has been moving Democratic. In 2020 Biden defeated Trump by 10 points and both Senators are Democrats. However, the most recent polls show the Virginia race even. Democratic candidate Terry McAuliffe has tried to tie his Republican opponent to Trump, but voters may be madder at Democrats than Republicans. McAuliffe has expressed his frustration with Democrats in Congress that they have been unable to act on the bipartisan infrastructure bill that passed the Senate with 19 Republican votes and would create jobs in Virginia.

Speaker Pelosi had to renege on her offer to House moderates for a vote on the infrastructure bill on September 27 when progressives vowed to oppose the bill. The Speaker has now said it was her objective to pass the infrastructure bill this week and has indicated that the BBB Reconciliation bill will be considered this week or next.

The bill that appears to be coming together is in the neighborhood of $2T which is going to be tough for some of the progressives to swallow. Senator Bernie Sanders has been saying recently that for him and other progressives $3.5T was a compromise from their initial goal of $6T for the BBB Budget Reconciliation legislation.

Not only have progressives had to compromise on the scope of domestic programs, but it appears that some of their tax priorities have also been removed. A higher capital gains tax and increase in the corporate tax rate have reportedly been dropped, but there are indications that the proposals to tax foreign income from US corporations will remain, and a new surcharge type tax is being considered for the “super rich” and the threshold to meet that standard is still being negotiated.

On the domestic agenda the bill appears to be reducing the expansion of Medicare benefits and the time available for parental leave. But, with a $2T price tag, obviously much remains. Incentives for clean energy, universal pre-K education, daycare and elder care appear to be in the compromise legislation.

What to watch: Do Democrats and the White House announce a deal on the BBB Budget Reconciliation, and can Speaker Pelosi get the progressives in the House to vote in favor of the bipartisan traditional infrastructure bill before the BBB Reconciliation legislation is passed.

Fed Chair

While the political world has been focused on the Biden program in Congress, much of the financial world is talking about the future of the Fed Chair, Jay Powell.  While earlier in the year there seemed to be a consensus that even though he is a Republican he would be nominated for a second term.  In my view while Powell is not out of the running his chances have been diminished due to three factors.

First is the politics of the Democratic Party and the outlook that progressives will be forced to accept a smaller BBB Budget Reconciliation package than they had hoped for.  As I wrote above, Senator Sanders and his followers originally wanted a $6T package, then reduced their goal to $3.5T and now appear on the verge of being forced to accept a $2T package.  The White House will need to try and repair hurt feelings on the left; the Fed Chair may be an opportunity to give progressives a win.

Second, the Fed is somewhat a victim of their success.  Fed policy under Chair Powell helped the economy survive and rebound from the cliff recession in 2020.  The plunge in economic activity was the worst since the Great Depression; it was also the shortest recession in American history, and the Fed and its Chair get some credit for the recovery.  Sometimes Presidents have re-nominated a Chair when the economy is on shaky ground and the President wants to send a reassuring message to markets. But today markets are strong enough, and stocks are close or at all-time highs, it is hard to make an argument that real market damage will occur if there is a change at the top of the central bank.

Third, while there was no apparently illegal activity, the trading by senior Fed officials has given the appearance of impropriety, and the Fed has responded with new rules for their officials.  The troubles occurred on Chair Powell’s watch and it may increase the pressure for a cleaning up of the central bank.

As a possible alternative, press reports often mention Board member Lael Brainard who has also served at the Treasury Department.  The Brainard nomination would likely be supported by Senate Democrats, but with a 50/50 Senate any degree of division among Democrats could sink the nomination. A re-nomination of Powell would likely get Republican votes to balance the loss of progressives such as Sanders and Warren, but a no-name with market credibility may be who the White House is looking for.  There are several respected economists who have served as regional bank Presidents who may come into play in the coming weeks.  Powell’s chances of re-nomination are not zero, but in my view they have been reduced by Democratic Party politics.