Key Takeaways:
- Ukraine continues to dominate headlines, Russian atrocities uncovered as Ukraine retakes towns, reports of Zelensky/Putin meeting.
- Fed March FOMC minutes Wednesday release, two new Fed governors close to Senate vote, May FOMC meeting next rate action.
- Biden’s FY 2023 Budget unveiled, increases for defense, infrastructure and public safety but tax proposal for ultra-rich grabs headlines.
- Covid aid and SCOTUS vote on Senate calendar.
Ukraine continues to dominate the news cycles as this weekend saw reports of atrocities on Ukrainian civilians by Russian troops. The dramatic photos increased pressure on leaders to find more ways of sanctioning Russia. NATO members seem more united than ever after President Biden returned from a round of meetings in Europe. NATO seems ready to give more military aide to Ukraine, find new sanctions, and importantly aid those frontline nations that are housing the millions of refugees created by the war. Ukraine and the search for peace is going to be a focus of public policy in the weeks ahead.
There were some indications over the weekend that the peace talks between Ukraine and Russia have made some progress and there were reports that Putin and Zelensky may meet. However, the reports of civilian killings will make peace talks more challenging. China, India and Israel continue in a role of mediators and perhaps these nations can bring Putin to the negotiating table. Every development and rumor will make headlines.
Fed
While the next meeting of the Fed’s Federal Open Markets Committee (FOMC) is still nearly a month away, speculation is rampant that the Committee will increase rates by 50bps in May. New clues may emerge when the Fed releases the minutes from the March FOMC meeting on Wednesday.
Powell as Chair has taken the position that Fed actions should be predictable and not surprise markets; therefore I expect signals to come from key Fed sources in the coming weeks. One such clue may have come from San Francisco Fed President Mary Daly who gave an interview to the Financial Times where she said the case may be growing for a 50bps increase following the 25bps increase in March.
One possible question mark is the addition of two new Governors who will serve on the FOMC and were nominated by President Biden. One of the nominees, Lisa Cook, failed to get a majority in the Senate Banking Committee when the Senators tied on the motion to send her name to the Senate. However, last week the Senate took a parliamentary step needed to move her name to a Senate vote, along with the Committee approved nomination of Philip Jefferson. It is expected that both will be confirmed prior to the May meeting. If the Senate has time they may act on the nominations this week.
Nearly all members of the FOMC, led by Chair Powell, have made the point that the goal of policy is to cut the inflation rate, but to do it in such a way as to have a “soft landing,” in other words avoid a recession. Data will be closely watched as the May meeting and future meetings approach and rates decisions are made.
Budget
Last week President Biden submitted to Congress his proposed budget for FY 2023 that begins on October 1, 2022. There was much attention given to the President’s proposal to pay for some of his budget increases with a wealth tax that would hit taxpayers with assets over $100M. The heart of the proposal was a scheme that would tax unrealized gains of these high net worth individuals.
I was interviewed by Barrons on the new budget and made the point that no one needed to panic as the tax was unlikely to ever be passed. First, Congress hasn’t passed an on-time budget since 1997 and in an election year when Republicans believe they have a chance to take control of Congress the chances of bipartisan cooperation on budget issues is near zero.
This is not the first time that a wealth tax has been proposed: it is a perennial favorite of progressive Democrats but they never get the votes to pass the idea. It is a very difficult proposal to draft, especially the concept of taxing unrealized gains. Some of the progressives who support the idea seem to understand unrealized capital gains, but don’t seem to have a comprehensive idea of unrealized losses. I don’t believe there is a single Republican vote for the idea, and several Democrats from competitive states will have a hard time joining the bandwagon; hence, this is not going to happen anytime soon.
Since the budget is unlikely to be adopted it becomes a political document to make points in a critical election year. The White House, facing the real possibility of losing control of both the House and Senate, wanted to send a message that would resonate with voters. Therefore the Biden budget has more money devoted to defense, public safety and infrastructure. Progressive Democrats, led by Senator Sanders, decried the defense increases; but the war in Ukraine, Russia’s aggression, and concern with China’s growing influence makes defense budget increases a popular issue with voters.
With crime rates increasing across the nation, many Democrats know that their message has to change from “defund the police” to one that recognizes the need to fully fund public safety. Police abuses will still be a Democratic focus, but more resources are called for in the budget.
The bipartisan infrastructure bill was one of the legislative highpoints during the first year of the Biden Administration and the budget builds on those successes.
However, the bottom line is that no budget is likely to be passed and the government will run on a Continuing Resolution through 2022.
Covid Relief and Judge Jackson
The White House and Congress have wanted to increase funding for Covid in anticipation of yet another wave. The FY 2022 Budget that passed in March originally had $14B for Covid but it was dropped from the legislation after progressive Democrats in the House objected to the way it was funded. Now a bipartisan group of Senators are nearing agreement on a new Covid deal that would contain $10B in programs. The bipartisan group largely funds the bill by reallocating Covid funds that were never spent. The new proposal also drops much of the money that was going to non-US global vaccine programs.
Another possible issue for the Senate this week is a vote on the confirmation of Judge Jackson to join the SCOTUS. In the past two weeks both swing Democrat Joe Manchin and Republican Susan Collins have announced their support of the nomination assuring confirmation when the vote does occur.