Electoral politics haven’t yet shut the pipeline of bipartisan action in Washington, although that horizon probably arrives within the next two months when the midterm season completely overtakes Congress. Momentum remains intact for completing the Fed Board, finishing FY22 appropriations, and following through on 2021 promises of more US chip industry support.
We too tire of President Biden’s net disapproval ratings chart but test your patience once more to make the point that the momentum to complete the Fed and to pass some market relevant legislation this quarter is driven by mutual incentives of congressional members. The inevitable closure of this window has more to do with the president and matters he influences as well as some beyond his reach.
Data released yesterday by Quinnipiac University Polling sheds light on the issue. Biden’s approval rating has dropped since Thanksgiving. Meanwhile, disapproval stabilized in early October. However, respondent’s views of Covid response management, the fate of Build Back Better (BBB), worsening inflation headlines and household costs are among the issues dogging the White House. Again, none of these dents congressional incentive to book achievements to appease various corporate and political supporters.
Federal Reserve and Banks
The White House and Treasury have put forward a slate capable of confirmation this quarter to complete the seven-member Board without drawing meaningful ire of important stakeholders, including the regulated financial services industry. The head of a banking advocacy group told us the slate of known and very likely nominees are not objectionable (he chided me for having believed Saule Omarova could or should be accepted).
US banks clearly expect to compete in the broad decentralized finance movement, including stablecoin. An interesting exchange on Tuesday between Senator Pat Toomey (R-PA) and Chair Jerome Powell confirmed the Chair’s view that “well regulated” stablecoins and central bank digital currency could peacefully coexist. Toomey on Thursday engaged Fed Governor and vice chair nominee Lael Brainard in a discussion on oft-mentioned climate risks that revealed Brainard never proposed or supported adding climate provisions to annual stress tests. Moreover, she believes regulated entities already have an idea about these risks since it affects their clients, customers, and books.
There isn’t a more regulated US sector than banks; it’s implausible that a new Fed slate or other Biden bank regulators could appreciably increase rule burdens on US banks. The sector’s considerable capital and liquidity buffers, generally talented leadership, and global competitive advantages cause us to repeat our high conviction view that policy is a net benefit to US banks.
Microelectronics
The US Innovation and Competition Act passed the Senate with strong bipartisan support (68 – 32). That spirit has been difficult to maintain in the House of Representatives but discussions this week point to passage within the coming month. There is risk the January 6 Commission’s activities and BBB’s collapse jeopardizes enactment, but a senior Foreign Affairs Committee aide agreed success is likely. This bill’s primary purpose is to help bolster US chip companies’ ability to produce and compete globally. Benefits would flow to chipmakers, their industrial customers, and consumer electronics companies.
Fiscal Policy
Talks of how best to avoid the FY22 February 18 spending deadline are in the hands of senior appropriations and leadership negotiators. Drivers remain covering inflationary costs of military operations and personnel, a return of Member earmarks, and enactment of new programs, projects and activities contained in the individual appropriations that continuing resolutions don’t permit. Aerospace/Defense is a winner if discussions result in passage of new spending bills (rather than another continuing resolution) which seems increasingly likely within a month.
Midterms
We remain in the consensus camp that history and current political trends support the probability of divided government next year. One point of the graphs, however, is that Biden’s fortunes don’t always presage those of either party on Capitol Hill. This week was a tangible example. The president may have failed to persuade activists in Atlanta of his commitment to election integrity and two Senate Democrats of his strategy to achieve it. The politics may not burden Hill proponents as much as it might him.
