Big Week: CPI, FOMC, FTX hearing, Government shutdown deadline

On Tuesday morning the government will release the CPI number for November.  It will be a critical day as the Fed’s Federal Open Markets Committee (FOMC) is starting two days of meetings on the next move for interest rates on Tuesday as well.  Obviously, the morning CPI number will be top of mind for the FOMC members as they start their two days of deliberations on interest rates. 

Powell has done a good job of telegraphing rate policy, and for this meeting all the signals point to a 50bps increase.  The FOMC obviously doesn’t meet in a vacuum and the CPI number will be part of their discussions as they take a careful look at all the available information.  Both the minutes of the November meeting and the Chair’s remarks earlier this month at Brookings indicated that there were several FOMC members who believed that the time may have come to slow the rate of increases.  This meeting seems to be the test of that resolve and is why consensus opinion leans towards a 50bps increase.

The decision will be announced around 2pm on Wednesday and that will be followed by the Chair’s press conference at 2:30pm.  In the past, Chair Powell has telegraphed the direction of future he expects at his post-FOMC presser.  At last month’s meeting the Committee issued a fairly dovish announcement that was followed by a more hawkish Chair at the presser, then through spokespeople and the Chair himself at Brookings some of the hawkishness was walked back. 

As I have written around previous pressers by the Chair, they are fairly unusual by DC standards, as the comments are basically fact checked via the release of the Committee’s minutes three weeks later. Chair Powell knows that the public will learn where the Committee’s center of gravity is on future rate policy and that must factor into his post-meeting comments.

FTX

Both the House and Senate Committees with jurisdiction for financial markets will hold hearings this week on the collapse of FTX.  Obviously, the star of any FTX hearing will be Sam Bankman-Fried aka SBF. On Friday there were reports that House Financial Services Chair Maxine Waters had been in touch with SBF and had a commitment for him to testify at her Tuesday hearing, but reports have varied and, in my view, there is only a 50/50 chance he will make a virtual appearance.

On the Senate side there were reports that Shark Tank star Kevin O’Leary might testify, as he reportedly took a loss on the failure of FTX. In both the House and Senate the current FTX CEO John Ray is a likely witness.

One thing that has changed little over the years since I worked as a Congressional aide on banking issues is that Congressional hearings aren’t the best venue for deep thought and analysis.  When I wrote questions for Members in both the House and Senate, my success was often measured by whether or not the questions I prepared got picked up in the national news cycle.  These hearings have two goals: first to make news for the participating Representatives and Senators, and second to lay down a marker to indicate to constituents that may have lost money that Congress is on the case.  Look for more entertainment than insight.

Budget Deadline

Friday night at midnight the current Continuing Resolution (CR) that funds the federal government runs out. Without Congress passing some measure the government will start a partial shutdown of non-essential services.  Essential workers such as military, flight controllers, law enforcement etc. need to report to work but won’t be paid until any impasse is resolved.

What Congress and the White House would like to do is to pass a so-called Omnibus Spending Bill that funds the government through the current fiscal year that ends on October 1, 2023.  The trouble with a CR is that it continues spending at the levels established for the past fiscal year; hence areas such as military protection and new spending for infrastructure run on outdated funding levels.  In fact, the House passed a new National Defense Authorization Act (NDAA) last week on a strong bipartisan vote of 350 to 80.  The NO votes were cast by progressive Democrats who thought the legislation gave too much money to defense.  The Senate is expected to pass the NDAA as early as this week but without funding legislation also being approved the military doesn’t get the new money.

The NDAA passed last week by the House hit a record $858B, which was $45B more than the White House had asked for.  Congress has also greatly increased authority for more spending aimed at veterans healthcare; but again without putting the larger amount into the funding bill, it doesn’t help. 

Democrats, while supporting the higher level for defense, also want to see more money for non-defense spending, but Republicans want to slow the rate of growth of non-defense spending. With Republicans set to take control of the House on January 3, there is a split between Republicans as to a strategy to continue a short-term funding bill until early next year, or clear the decks of this year’s spending priorities and have the new Republican majority work on the budget for the next fiscal year that will begin on October 1, 2023.

To further complicate the political calculus, the House Republicans have not sorted their top leadership position for the next Speaker.  With a paper-thin margin of only five votes, a handful of conservative Republicans can hold the entire government budget hostage for their pet causes.

At this point, it appears that the most likely outcome this week is to pass a short-term CR, but the unanswered question is how long the CR should run.  One school of thought is for a few weeks so that Congress can return from a short Christmas break and complete the Omnibus Spending Bill.  The alternative idea is to have the CR run into early 2023 and let the divided Congress figure out what to do.  Bottom line, a lot of headline risk for markets as both sides play a game of chicken with the funding of the US Government on the line.