Washington Weekly: Inflation Arguments

The Senate passed a broad gun control / school safety bill (see below) and confirmed various Biden administration nominees. The House will pass the Senate gun control bill and passed legislation to address mental health and substance abuse.

The Senate will be out of session and return to Washington on July 11. The House will work in committees but has not scheduled final votes on bills until the week of July 11.

Gun Control / School Safety.

A bipartisan group of Senators earlier this week introduced a gun control / school safety bill that generally tracked the outline we highlighted last week. With its continued bipartisan support, the Senate passed the bill yesterday and the House is expected to pass it today. This bill will not solve all of the nation’s gun violence problems, but it may help. Finding common ground and bipartisanship on any issue, particularly one as emotionally charged as gun violence, isn’t easy in the hyper-partisan environment that exists in Washington these days. With this context, lawmakers feel positive about this accomplishment. Enough Senate Republicans were able to go a little beyond their comfort zone in accepting this agreement, while most Senate Democrats were willing to compromise and resist making demands they knew didn’t have bipartisan support. Credit for the bill goes primarily to the key negotiators: Senators Chris Murphy (D-CT), Kyrsten Sinema (D-AZ), John Cornyn (R-TX) and Thom Tillis (R-NC).

January 6 Select Committee.

House January 6 Committee Chairman Bennie Thompson (D-MS) announced that hearings would extend into July given that new evidence and information have come to light. The committee’s original intent was to hold hearings only in June. In the five hearings held so far, the committee has laid out a case that former President Trump played a central role in the violence at the US Capitol on January 6. Most of the evidence presented so far has come from testimony from former Trump administration officials and statewide Republican officials. In the process, the committee has shown the divide among Republicans over the legitimacy of contesting the 2020 presidential election result. The public exposure of this fissure will continue to spill into the current political arena and provide momentum for Republican voters (and independent voters inclined to support a Republican) looking for an alternative to Trump in 2024. That may not have been the committee’s intent, but it is certainly a part of the discussion in Washington among elected officials and party leaders.

Inflation Arguments.

Coming on the heels of a large 75 basis point rate hike last week, Federal Reserve Chairman Jay Powell testified this week in hearings before both the House and the Senate. At the hearings, lawmakers on each side of the political aisle put forward competing arguments and narratives regarding rising inflation and the policy response to it so far. Democrats cited greater corporate concentration, supply chain disruptions and the war in Ukraine. Republicans blamed last year’s stimulus bill and other Biden administration policies. They also criticized the Fed for being too late to react and argued that the Fed should be more reliant on firm rules (rather than the board’s discretion) to set monetary policy. Lawmakers from both sides of the aisle generally expressed feelings of goodwill towards Chairman Powell, who recently was confirmed by the Senate for another term. However, the Fed’s position is fraught as it takes a hawkish posture toward monetary policy to try to slow down the economy and reduce inflation without inducing a recession (something that Powell more explicitly acknowledged as an increasing risk). Inflation will likely be the number one issue for voters in November, and the Fed will be at the center of the political debate.

Futile Inflation Remedies.

While lawmakers and their political allies continue to bicker over the causes of higher inflation, neither the administration nor Congress has proposals likely to bring relief anytime soon. Beyond targeting large companies that he argues have unfairly profited from their dominant market positions, President Biden has expressed support for a release of oil from federal reserves in an effort to lower oil and gas price as well as a three-month gas tax “holiday.” This last proposal, which President Biden floated this week, is considered a non-starter with many Democrats and Republicans in Congress who argue that it would produce minimal relief for consumers while crippling infrastructure priorities. Republicans want to address inflation through regulatory relief (particularly more incentives for domestic energy production), targeted tax cuts, an end to more fiscal stimulus spending (including unspent funds from past bills) and the negotiation of new free trade agreements. While the ideas favored by the two parties make for great debate, none will bring relief from high inflation any time soon. This underscores the reality that inflation will persist for at least the foreseeable future and that the primary policy response will come from the Fed through monetary policy (and not from Congress or the White House).

Ukraine Woes.

In conversations with lawmakers and others in Washington, we have noticed a significant reduction in focus on the war in Ukraine. The subject also is less of a media focus, with major US newspapers having pushed it off the front page and with cable shows rarely leading with it. This trend has coincided with Russian land gains in eastern Ukraine. With other issues potentially gaining more attention, will the US and allied efforts to help Ukraine stall relative to Ukraine’s ongoing needs? Frustration will soon grow in Washington if these trends accelerate. The next policy debate may be over the objective of these efforts. Is it simply to help Ukraine defend itself or to provide enough assistance to achieve victory as Ukraine defines it? We don’t know whether this is simply a lull or if the commitment to help Ukraine has peaked, but the only beneficiary of the latter scenario is Russian President Putin.

Retirement Savings.

The Senate Finance Committee this week approved bipartisan legislation to help Americans save for retirement (commonly known as “SECURE 2.0”). The House passed its version of the bill last year, and another Senate committee passed a complementary bill the week before. Both the House and Senate versions share some core provisions that likely will be part of any final bill. These include an increase to the required minimum distribution (RMD) age to 75, increases to catch-up contributions (from age 60 to 63) and a retirement match for student loan payments. Given the overlap among the three bills, it should be manageable for Congress to iron out their differences. While partisanship can derail almost anything in Washington these days, we remain optimistic that a version of these bills will be passed into law, likely late this year.

Conservation Easements.

A few years ago, Congress enacted an enhanced federal tax incentive for land conservation easement donations referred to as conservation easements. Since their creation, the IRS and some lawmakers have expressed concern over abuses in the law, known as syndicated conservation easements. The stalled Build Back Better (BBB) legislation aims to discontinue these specific conservation easements to include retroactively ending deals dating back to 2016. With BBB still languishing in the Senate, a bipartisan group attached an amendment to the retirement bill mentioned above that would end the tax benefit of syndicated conservation easements (but would leave other conservation easements safe). It is noteworthy that this amendment is not retroactive to 2016, a strong signal that these prior easements are likely safe from retroactive taxes.

On Deck at the Supreme Court.

The Supreme Court has only a few days left to announce its decision on a handful of pending cases. We mentioned the abortion case (now finalized) last week. The court this week decided a controversial case involving restrictions on individuals seeking a license to carry concealed guns. One overlooked case still to be decided is West Virginia v Environmental Protection Agency, a legal challenge by various states that questions whether federal agencies can craft major regulations without clear authorization from Congress. We believe the court is likely to rule in favor of the plaintiffs, thereby hemming in the executive branch’s regulatory authorities. This would have the practical effect of preventing the Biden administration from advancing some key parts of its regulatory agenda, particularly in the climate change and energy spaces, but in other areas as well. The regulatory agenda is important to the President’s ability to fulfill many of his campaign and policy promises, and it is likely that this agenda will be severely crimped over the next two years if the court rules in favor of the states.

The Next Speaker.

While an election outcome is never a given, Republicans are at this point the odds-on favorite to recapture at least the House following the elections in November. A change of power in the House would be impactful for many reasons, one of which is the leadership change between the parties. House Minority Leader Kevin McCarthy (R-CA) has been the assumed Speaker-in-waiting if Republicans take control of the House, but earlier this week former President Trump expressed unhappiness with McCarthy over his handling of the January 6th committee. The former president has remained coy about whether he would endorse McCarthy for Speaker if Republicans take control of the House. Trump’s influence may hinge on the number of seats Republicans gain (if any). The more seats they pick up, the less influence Trump will have in a more diverse House Republican conference. If Republicans pick up a small number of seats (5-15), Trump’s influence would be more outsized and the selection of a Speaker could be a challenge. A contested race for Speaker is the last thing most House Republicans want if they win the majority in the lower chamber.