Key Takeaways
- FOMC met, took no action, but again telegraphed March increase. How many increases up to economy: pundits range 4 to 7.
- Fed policy surprise vs telegraph. Atlanta Fed Pres Bostic poses possible 50bps increase. Fighting inflation Volcker surprised with increase of 250bps, lots of examples for Powell and team to look at.
- Congress must deal with February 18 deadline for new federal spending bill. Talks to continue to reach bipartisan Omnibus Spending Bill to increase funding levels and change priorities. Afghanistan, Russia and China policies all point to need to change Defense, but Ds will need to see Domestic spending increase in deal.
- Democrats facing falling poll numbers for Biden look to revised Build Back Better to excite base before midterm Election Day.
- Putin’s Made In Russia crisis in Ukraine overhangs global politics.
Last week as expected the Fed’s FOMC met and kept interest rates unchanged, but Chair Powell made clear that increases are coming and March is the likely date. The FOMC will next meet March 15-16. As I have written Fed Chairs can surprise with rate moves, or telegraph moves to enable market participants to make decisions based on clear readings. In recent weeks Fed pundits have speculated on how many increases the Fed may make in 2022 and predictions range from 4 to 12. I believe just as Chair Powell has made clear the intent of the Fed to increase in March, other increases will be well telegraphed.
Over the weekend Atlanta Fed President Ralph Bostic speculated that the Fed could increase rates by 50bps in a future action if the members of the FOMC believed tougher actions are needed to curb inflation.
One story I like to tell is that in my early days in banking on October 22, 1979 under Chair Paul Volcker the FOMC had a telephonic unscheduled conference call meeting and increased rates 250bps. I remember the shock at my bank as the computers were only programed to increase rates by no more than 200bps so quick reprograming for loan payments tied to prime had to be undertaken. Best example I can think of when the Fed surprised rather than telegraphed rate action. Expect telegraphed policy from Powell in 2022, unless inflation runs out of control.
February 18 deadline
When the Congress returns this week the top priority will be work by the bipartisan leadership on the House and Senate Appropriations Committee to try to write a spending bill for FY 2022 that began on October 1, 2021. To avoid a government shutdown due to no approved federal spending bill, Congress has passed a series of Continuing Resolutions (CR) that keeps the government funded at the prior year’s spending levels. This means no new programs and changing priorities aren’t accommodated. Late last year Congress approved the National Defense Authorization Act (NDAA) that approved new spending for Defense; but to implement the new levels and priorities Congress must pass a FY 2022 budget for DoD. The current crisis in Ukraine only serves to demonstrate the changing needs of the US military, and the urgency many in Washington see to pass new Defense spending.
While the NDAA passed with large bipartisan majorities in both the House and Senate, Democrats take the position that in addition to urgent needs in Defense, there are also urgent Domestic needs and these need to be addressed in the new budget as well. This is a common theme in budget battles and the compromise is usually an even split between increases for Defense and Domestic spending. Deciding which programs need increases and what new programs need to be funded will be the focus of the so-called “four corners”, the leaders on the Appropriations Committees in the next few weeks. At some point action will be needed, as the result of no new spending bill by February 18 is a government shutdown – a result no one wants.
Build Back Better (BBB)
Democrats are still licking their wounds from the death in the Senate of the House passed BBB legislation. The end came when Senator Manchin pulled the plug; but there is still hope that Democrats, including Manchin and Sinema, can unite around a revised package. Speaker Pelosi has suggested that the new bill have a new name; probably not a bad idea as Senator Manchin has been clear that there needs to be a rewrite.
The House Progressive Caucus issued a statement last week that they want a BBB passed by March 1, which in my view reflects a disconnect from reality; a revised package is possible but not until later in the year once the budget battles are finished. Senator Manchin has always been a supporter of spending programs that bring money back to West Virginia and several Democrats have suggested that the White House just sit down with Manchin and let him write the bill. With Biden’s sinking polling numbers Democrats know they need a win in the summer to energize their base if they are to have any chance of keeping control of Congress after the midterm elections.
Ukraine
The focus of Washington and the world is on Ukraine and what Russian President Putin is going to do. Putin knows that the US will not commit ground troops to defend Ukraine; but he also knows that US Dollar sanctions will be placed on Russian trade if he invades. The US Dollar remains the principle currency for global trade and being blocked from Dollar clearings could inflict real pain on the Russian economy.
Putin is not without economic tools of his own; mainly the reliance of Europe on Russian energy. Former US Ambassador to Russia Michael McFaul Tweeted over the weekend: “Those who predict with confidence that Putin will launch a full-scale invasion of Ukraine know something about Putin that I don’t. Those that predict with confidence that Putin will not invade Ukraine know something about Putin that I don’t. And I know a lot about Putin.”
Bottom line the world will wait and see what Putin does. This is a Made in Russia crisis and only Putin and Russia can determine the endgame.
