Key Takeaways

  • Congress funds government until February 18, 2022.  Can Congress reach an agreement before the next crisis to update spending priorities?
  • Debt ceiling is the next crisis with no strategy in place.
  • Jay Powell awaits hearings and confirmation by the Senate.

Busy December

Last week the Congress avoided a government shutdown by passing a Continuing Resolution (CR) that runs until February 18 of next year.  The Congress is supposed to annually review every department of government and then approve a new budget each year to increase or reduce spending on programs.  The appropriations process is designed to allow Congress to review and change spending priorities.  However, with the high level of discord in Washington Congress has been unable to approve the various departmental budgets, and instead has passed a series of CRs that maintain funding at the same level as the previous year.  

The new CR, which passed the Senate on a 69 to 28 bipartisan vote, run until 1Q22, is designed to allow the Congressional Appropriations Committee time to pass appropriations bills to fund government agencies at a level appropriate for their 2022 missions.  In the past when there has been deadlock over appropriations the partisan split between Republicans and Democrats has been dealt with by an even split between increases in defense spending and domestic programs.  The new CR gives Congress time to reach this kind of deal before the next government shutdown crisis comes in February.

Debt Ceiling: While an agreement on government funding was passed there is no strategy on how the Congress will increase the debt ceiling.  Failure to act in a timely manner could lead to a first ever default by the US Government–clearly a headline risk with serious implications.

Treasury Secretary Yellen has estimated that the government will need to borrow to pay bills on or about December 15; but independent firms that track government cash flows believe that the date may be days or weeks later.   This has always been a tough number to track but the government’s payments and receipts have been even more unpredictable during the pandemic.  At some point the Secretary will notify Congress of the “drop dead” date when Congress will need to act.

From my days as a Congressional staffer I know that the vote to increase the debt ceiling, while necessary, is one of the most politically difficult votes for Members of the House and Senate who face competitive races.  The reason is 100% political; it is such an easy issue to demagogue and so difficult to explain.  The debate largely ignores the fact that the debt ceiling increase does not fund any new programs, but merely allows the Treasury to pay bills already incurred.

Senator McConnell has said that Republicans will not vote to increase the debt ceiling, though in October he and 10 other Republicans cast a key vote that allowed for the Senate to debate the $450B increase in the ceiling and avoid a Republican led filibuster.   When the vote came on increasing the ceiling McConnell and all Republicans voted “No.” However just for allowing the debt ceiling to pass and avoid a filibuster Senator McConnell was strongly criticized by many conservative Republicans led by former President Trump. In this environment the strategy to increase or suspend the debt ceiling is a necessary measure but currently without a plan to achieve the goals, though Senator McConnell has reiterated his view that the ceiling will be dealt with and no default will occur.

Last week one idea that got some traction was to add a debt suspension to the must-pass National Defense Authorization Act (NDAA), though as the week came to an end it appeared that the idea was losing support.  The fundamental problem the government faces if it were to run out of borrowing authority is the impossibility of choosing what bills to pay and what bills not to pay.  Because the cash needs of the US are so large, the missed payment will need to be for a major account; ideas have ranged from not paying a US Note or T-bill that comes due, delaying a monthly social security check, not paying federal workers that could include active military.  The bottom line is that there is no alternative to paying our bills and increasing the debt ceiling.  As is my advice on so many issues in Washington – stay tuned.

Powell nomination

The current term for the Fed Chair doesn’t end until February giving Congress some time to approve the President’s nominee.  The first step in the process will be a Senate confirmation hearing.  Knowing that Senator Elizabeth Warren is opposed to the nomination, the Senate Banking Committee hearing is likely to be contentious.  No date for the hearing has yet been set, and with the list of items that need to be passed by end of year, my guess is that the hearing will occur in January.

At this point we know that several Democratic progressive Senators will vote against the nomination, meaning that confirmation will require support from Republicans. Knowing that his confirmation will require a bipartisan vote Powell will need to be nimble as he testifies before Congress and talks to the press after the Open Markets Committee Meeting December 14-15.

Powell is a Republican with whom I worked during the Bush Administration and was nominated to be Chair by President Trump; his Republican pedigree on top of support from President Biden should be more than enough to assure confirmation.

Disclosures (show)

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