Last Friday Fed Chair Powell gave his long anticipated speech at the Jackson Hole symposium for central bankers. I didn’t think Powell’s Jackson Hole speech was as hawkish as some had expected. “Could” was a persistent word on what policy might be. Data could warrant more increases but towards the end he said they could hold constant and await more data. I think this is a signal for pausing in September and data driven going forward.
In the minutes from the July meeting of the FOMC it was made clear that several of the Committee members have some level of concern that the Fed could over tighten and problems with the economy would follow. This poses a new set of issues for Chair Powell as the Committee was united in the increases that were approved over the past year.
During the July press conference after the Committee approved the 25bps hike, Powell made clear that in his view rate cuts were unlikely in 2023 but could be on the table next year. Several commentators made the point that in his Jackson Hole remarks the word cut didn’t appear.
Every time Chair Powell speaks he makes the point that at each meeting the Committee reviews the incoming data and there will be another CPI number before the September meeting. In Washington political circles CPI is the critical economic data point as it is widely reported in the media and easy for the public to understand.
Bottom line I thought the Chair’s speech was balanced and pointed to a pause in September and data driven flexibility in November.
China visit
The Biden Administration continues its effort to heal relations with China sending Commerce Secretary Gina Raimondo to China this week for four days of talks. The trip follows visits earlier in the year by Secretaries Yellen and Blinken. This will be the first visit to Beijing by a Commerce Secretary in seven years. Much of the tension in the China/US relations revolves around trade policy that falls under the jurisdiction of the Commerce Department. Reportedly the Secretary hopes to set up joint working groups to reduce trade issues.
There continues to be staff level talks between the two superpowers focusing on a possible Biden/Xi meeting in November, another topic likely to be part of the discussions with Secretary Raimondo.
Budget
While Congress remains on recess, there is a great deal of conversation about the need for Congress to act on the 12 spending bills necessary to keep the government open after the end of the current fiscal year on September 30.
Speaker McCarthy has a difficult job in navigating the passage of the 12 spending bills presiding over a mere five seat majority in the House.
Last week conservative House Republicans announced that they won’t automatically sign on to a planned continuing resolution (CR) that will likely be needed to avoid a government shutdown on October 1. Many of these Republicans traditionally oppose CRs saying that it’s an abrogation of Congressional responsibility to review and approve new budgets each year. Most of these Republicans opposed the debt ceiling/budget deal negotiated earlier in the year between the Speaker and the President. Under the Biden/McCarthy agreement spending would be held at current year levels. Conservative Republicans have been demanding that total government spending be reduced to spending levels of FY 2022. A continuing resolution, by definition, continues spending at current year FY 2023 levels. However, the demands went further than reduced spending levels; these members want money for the Southern border, limits on the Justice Department investigations, and curbing the “blank check” for Ukraine spending.
As Speaker McCarthy works on a budget strategy he also needs to take into consideration that in addition to the large block of conservative Republicans he also has a small group of 18 House Republicans who sit in seats won by Joe Biden in 2020. Again, with only a five seat majority he can’t lose more than four votes meaning that he either has to have nearly complete support from House Republicans or seek help from House Democrats as he did with the debt ceiling deal.
The House doesn’t return until September 11 making it a mad dash for the finish line to avoid a shutdown on October 1.
Crypto IRS rules
Last week the IRS issued proposed rules designed to improve tax compliance for holders of crypto. The industry expressed concern with the information that participants may need to file with the government. Here is a link to the 200+ page document.
The proposal will be officially printed in the Federal Register on Tuesday and that will begin a comment period that runs until October 30th. The Treasury Department announced that in addition to the written comments the Department will hold hearings on the proposed rules on November 7 and 8.
The comments are likely to focus on the amount of disclosure and several crypto supporters have made the point that excessive regulation is likely to push these markets and dealers off shore.
While the goal of the legislation directing the Treasury Department to get crypto rules in place as soon as possible was to increase revenue from tax compliance, the complexity of the issue will likely require the rule making process to carryover until next year, with new rules in place by 2026 covering tax year 2025.