• Ukraine will dominate news cycles in coming days.  Congress not in DC but ready to approve sanctions.
  • Main sanction, blocking order on Russian USD assets, can be done by President with Executive Order.
  • Congress extends current budget talks until March 11 with hope of new spending plan.
  • Senate Banking Committee members talk of plan to confirm Powell and other Board nominees.
  • ·March opens with Powell testimony on monetary policy, rate talk, and FOMC meeting.

The world is focused on Putin’s Made in Russia Ukraine crisis.  Russia has leverage provided by its role in providing oil and gas to Europe, it will be seen in coming days what impact the crisis has on global energy markets. Is diplomacy over to resolve crisis?  Is the support and troops Putin announced for Russian backed separatist states an invasion of Ukraine or a continuation of ongoing policy?

Biden announced sanctions aimed at the separatist states of Donetsk and Luhansk and additional sanctions are expected.  Germany has announced termination of new pipeline. Will US Secretary of State Blinken still meet later this week with Russian Foreign Minister Lavrov?  Many questions but crisis is real and ongoing.

Having worked at JPM and served as a Vice Chair of the State Department’s Advisory Committee I have seen the powerful tool available to US policy makers created by the role of the USD as the global reserve currency.  Sanction aimed at US bank’s role in the payments system, and blocking assets held in US banks are obvious sanctions that can be executed by Presidential executive orders.

Budget

Before leaving for the Presidents Week break, the Congress approved a Continuing Resolution (CR) that runs until March 11.  The goal is for Congress to approve a new budget for the federal government that will last for the remainder of the current fiscal year that began on October 1, 2021.

Under a CR the budgets for all the departments of government remain at the level set in the previous budget.  Since the government has been operating on a CR it means that while Democrats control the Congress and White House, the government is a Trump budget approved for the fiscal year that began on October 1, 2020.  Obviously, Democrats want to change priorities to reflect the goals and programs of the Biden Administration.

The challenge of course is the 50/50 Senate and the need to get a bipartisan budget agreement.  Talks are ongoing to find a budget deal that would increase defense spending, and also increase nondefense domestic programs.  While Democrats technically control both the Executive and Congressional branches, budgets can be filibustered and hence leverage is given to Senate Republicans.  Congress last year passed a Defense authorization bill that would increase defense spending by $25B but it needs to be implemented with a corresponding appropriations bill to fund the new programs and priorities.  The need for the higher level of spending is supported by a broad bipartisan coalition; but is opposed by a much smaller group of progressive Democrats.  In order to put together a bipartisan deal, House and Senate negotiators are that would provide equal levels of increased funding to both defense and nondefense programs.  Reportedly talks are progressing and it is widely expected that Congress will pass a new budget, with the increased levels of spending, prior to the March 11 deadline.

Fed

The Senate Banking Committee was unable to approve neither Jay Powell for a second term as Fed Chair, nor three other Biden nominees for Board seats when Senate Republicans blocked the Senate Banking Committee from meeting by boycotting the session.  This action is permitted under the power sharing agreement reached between McConnell and Schumer with a 50/50 Senate. 

As statements by Republicans have been made, their major objection is to positions taken by nominee Sarah Bloom Raskin focused on the role of banks in financing climate policies.  Over the weeklong break talks are being held behind the scene to find a compromise in order to get new Fed members and the Chair confirmed prior to the March FOMC meeting and expected action on rates.

The press is also filled with reports from various sources on the direction of Fed interest rate policy as the March 15/16 meeting approaches.  While some have talked of an aggressive move by increasing rates by 50bps, the Chair and others seem to be telegraphing a 25bps move with plenty of leeway to make more moves in the coming months.  While it is not unprecedented for the Fed to make interest rate moves between meetings, a schedule of monthly meetings is a good policy tool that allows the central bank to review data and make changes that match the data.

Next week Chair Powell will be giving his semiannual monetary policy report to Congress.  It is likely to be his last public comments prior to the FOMC meeting.  Powell is scheduled to appear before the House Financial Services Committee on March 2, and the Senate Banking Committee on March 3.

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