This Week: The House approved a package of legislation to protect and expand certain health care measures and lower prescription drug costs. The Senate confirmed a group of Trump administration nominees.
Next Week: The House will vote on a bill to override actions at the Consumer Financial Protection Bureau and take up retirement legislation. The Senate will vote on a disaster aid funding bill to help individuals and communities affected by wildfires, flooding, hurricanes and other natural disasters in various states and Puerto Rico.
Financial Services Issues
Regulatory Disconnect. In a week in which top banking regulators appeared on both sides of Capitol Hill, Democrats and Republicans sparred on the extent and potential impact of regulatory relief measures taken by the Trump administration. A group that included two former Federal Reserve chairs and two former Treasury secretaries criticized plans by the Financial Stability Oversight Council to shift away from designating individual nonbank financial companies as systemically important to addressing risky activities across firms. Meanwhile, the top Democrat on the Senate Banking Committee called on the banking regulators to take steps to curb leveraged lending while a group of Democrats in the House criticized the administration’s overall efforts to reduce regulatory burdens in certain areas. These refrains were countered by calls by many Republicans for the regulators to move faster and further in implementing aspects of last year’s regulatory relief legislation and in following through on more extensive regulatory reform recommendations made by the Treasury over the past few years. Notably, the regulators have outstanding proposals to tailor the regulatory requirements of different banks based upon their size and risk profile and will finalize those later this year. Amidst the discordant messages from the Hill, the regulators will continue with their own deliberate path of incremental and targeted regulatory changes.
Other Issues in Play
US-China Trade Negotiations. Following last week's tumult, both countries moved early this week to further escalate trade tensions by announcing new rounds of higher tariffs. Nevertheless, the confrontational public rhetoric has calmed a little this week, with negotiators staying in their home countries to plot their next moves. It seems to us that when the negotiators have been in the same room, some progress, albeit sometimes limited, has occurred. On the other hand, when they have been in their respective capitals, they speak to others in their governments and their positions subsequently harden. It's unclear whether the negotiators themselves can break this impasse and resolve the issues at hand. That may only be a job for President Trump and President Xi, who could meet in Japan on June 28 or 29 as part of the G-20 summit. There will be tremendous pressure on both presidents for this meeting, but we consider such a meeting (if it occurs) a good sign. Until then, there seems to be little prospect of a US-China deal. We still see a pathway for a limited agreement in the next two months but readily admit that there are more serious obstacles to a deal today than there were two weeks ago.
Farmer Power. President Trump's strategy in the US-China trade talks has always been to leverage higher tariffs or the threat thereof to gain concessions from the Chinese. He knows this involves short-term pain for certain US industries and consumers but assumes an eventual agreement will provide more attractive long-term relief and opportunities. His primary political challenge has been the tariffs' impacts on the agriculture industry. The farm belt, already suffering from low prices unrelated to the China spat, has weathered the higher tariffs imposed by China but this will only last for so long. If the President shows more flexibility in the negotiations, it will be in response to the vocal concerns of farmers and the broader agricultural industry, particularly those in the swing states of Iowa, Michigan, Wisconsin and Ohio. He needs those voters to validate him on trade issues and to support him in the upcoming 2020 election. Look for a possible pivot by Trump as they raise their concerns more publicly.
Better News on Trade. We're being told that the US, Mexico and Canada are close to an agreement to reverse higher tariffs on steel and aluminum exports to the US as well as retaliatory tariffs. The elimination of these tariffs has been expected. Many lawmakers view it as a pre-requisite to voting for the US-Mexico-Canada Trade Agreement later this year. While the tariff relief will be welcomed by most stakeholders, it is possible that the tariffs will be replaced by quotas on Canadian and Mexican exports of steel and aluminum. That would be a better alternative to high tariffs but still will impede trade among the countries and economic growth. Higher tariffs on steel and aluminum will remain on exports from South Korea, China, Brazil and Russia, among others. This tariff relief for the North American countries will be good news when it occurs and may provide the perception that the tariff wars initiated by the US are coming to an end, which we are not ready to validate.
Communications Security. President Trump this week signed an executive order declaring a national emergency to protect the U.S. telecommunications system. It specifically directs the Commerce Department to promulgate rules to block transactions involving communications equipment developed by foreign adversaries. Amidst escalating trade tensions with China, the effort clearly targets Huawei and other Chinese companies involved in developing critical communications infrastructure, particularly 5G networks. Commerce separately placed Huawei on a list of entities presenting national security concerns, thereby curbing its ability to buy U.S. technology. The success of these efforts will depend in part on the willingness of other nations to follow suit, and the administration has had mixed success to date in trying to persuade other countries from not using Huawei to help build out their communications networks. These actions will have support from Congress as members on both sides of the aisle share many of the administration’s concerns, as was evident in a Senate hearing this week on security threats related to 5G technology. Indeed, similar concerns animated successful bipartisan efforts in Congress last year to reform the intergovernmental body charged with reviewing the national security implications of foreign investment in the U.S. President Trump had kept this order in his back pocket for months and saw little downside to pull it out now when trade talks with China already were at a low point.
Investigations Overload. House Democrats are investigating the President and are expected to cite another cabinet member for contempt of Congress in the coming days. A bipartisan group of Senators has arranged a closed hearing to question the President's son, Donald Trump Jr. The Justice Department is investigating the actions of the FBI in launching its Russian investigation two years ago. The perception of the investigations as either necessary actions or political payback, depends on what cable TV show people watch. The House hearings and contempt action will get all of the attention for the rest of this month, but that doesn't mean we will learn anything new. We urge you to take all of this activity with a grain of salt and not view it as having a meaningful market impact. For now, these actions are just part of the broader partisan divide that defines Washington these days. Only with new, serious and factual information will they become truly significant. With many of these investigations likely to become court cases, such information won't materialize anytime soon if it does at all.
Student Loans and Retirement. Lawmakers are concerned that student loan debt, which is now estimated to be $1.6 trillion, is hurting millions of Americans but also hindering retirement savings. As a result, Senator Ron Wyden (D-OR) has been exploring legislation to allow employers the option to match a student loan repayment with a 401(k) contribution. Additionally, Senators Rob Portman (R-OH) and Ben Cardin (D-MD) released a larger retirement bill this week that included this provision to help Americans pay off student loans and save for retirement at the same time. This idea is still new and most members of Congress need to become more familiar with it. Despite the contentious political environment, we think this idea can gain traction and pass this year or next year.
Dubious Records. Former Vice President, and Democratic presidential candidate, Joe Biden could set a record for the longest stretch between first being elected to public office and being nominated for president for the first time if he wins the nomination next year. Biden first held office in 1970 when he served on the New Castle County Council, and the 50 years between that election and the 2020 presidential election would surpass former Republican nominee Bob Dole's 46 years and former President James Buchanan's 42 years. Additionally, if he does win the nomination, it is notable that nine presidents were sworn in before even turning the age of 50. While this is certainly an impressive record, it may be one that Biden would prefer to avoid having mentioned since as we covered in a past edition of the Washington Weekly, his age could be a liability on the campaign trail.