Washington Weekly: Reconciliation Reckoning

The Senate confirmed Trump administration nominees, including Kevin Warsh to a four-year term as Federal Reserve Chairman as well as a 14-year term on the Federal Reserve Board of Governors (see below). It also approved a measure to have Senators’ pay withheld if a government shutdown occurs. The House passed legislation to allow E15 ethanol-mixed gasoline to be sold year-round (see below) as well as law enforcement-related bills. It also passed its first (Military Construction-Veterans Affairs) of 12 bills required to fund the government for fiscal year 2027.

The Senate will continue to consider Trump administration nominees. The House plans to vote on a bill to codify rules for paying collegiate athletes and add to the NCAA‘s antitrust protections. Both chambers will likely vote on a reconciliation bill (see below).

China Summit.

There was much attention this week on the pomp and circumstance of the long-awaited summit in Beijing between President Trump and President Xi Jinping, which had been postponed from March to May because of the still ongoing conflict in Iran. China is reluctant to insert itself into the conflict even though it is a predominant buyer of Iranian oil and has a broader interest in seeing a reopening of the Strait of Hormuz. Instead, China was more interested in issuing a warning to the US that disagreements on Taiwan could lead to conflict between the two superpowers. While ostensibly the visit focused on commercial relations, there were limited breakthroughs in this arena beyond some commitments from China to buy US goods and conceptual plans to establish boards to boost trade and investment between the two countries. While the Trump administration would like to keep the threat of further tariffs on the table, it also had an objective of maintaining last year’s trade truce given China’s willingness to use its dominance in the mining and processing of critical rare earth metals for negotiating leverage. Going forward, President Trump invited President Xi to Washington for a state visit in September. There are many major strategic economic and security issues (including Taiwan, AI and technology competition and interdependence, military crisis communications, and arms control, among others) for that and future meetings between the leaders.

Reconciliation Reckoning.

Senate Republicans this week continued work on a $70 billion reconciliation package focused on funding Immigration and Customs Enforcement (ICE), Customs and Border Protection (CBP), and other border security priorities. Reconciliation bills are able to pass the Senate with a simple majority vote without reaching a 60-vote procedural hurdle appliable to most bills, but they cannot have extraneous provisions without a primary budgetary purpose. The Senate Parliamentarian makes determinations on these questions. Her rulings next week will determine whether significant provisions remain in, need to be rewritten, or are stripped out of the reconciliation bill. One cause of growing heartache is a $1 billion Secret Service funding provision tied to security enhancements for the proposed White House East Wing ballroom project. Some moderate Republicans have raised concerns about the political optics and whether the provision satisfies the strictures of the reconciliation process. The process will continue next week and will culminate in a marathon session of votes on amendments before the end of the month.

Crypto Bill.

After needing to pull the plug on a planned mark-up back in January, the Senate Banking Committee passed a crypto market structure bill. While there have been efforts in the intervening months to work out a bipartisan compromise, the bill passed on a mostly party-line vote. Two Democratic Senators voted for the bill as an expression of goodwill as lawmakers continue to negotiate on a variety of outstanding issues. A major area of focus has been a section on the payment of interest on stablecoins (digital assets backed by dollars or other fiat currencies). A stablecoin bill signed into law last year has a nominal prohibition, but it does not prohibit payment of interest or other rewards programs paid by affiliates and partners. A bipartisan compromise emerged in recent weeks, but the banking industry has opposed the latest version because it still contains loopholes with potentially negative implications for bank deposits. The biggest outstanding issue, which could determine the ultimate fate of the bill, is on ethics provisions aimed at addressing potential conflicts of interest from the Trump family’s and administration officials’ crypto ventures. Negotiations will continue, but the outstanding issues are both complex and contentious and it will be difficult to build the bipartisan support needed to pass the bill by the time it comes before the full Senate (likely some time before the August recess).

Tough Fed Decisions.

In advance of the expiration of Federal Reserve Chairman Jerome Powell’s term as chair, the Senate this week approved the nomination of his successor Kevin Warsh (a former Fed governor from 2006 to 2011) in a 54 to 45 vote (all Republicans and one Democrat voted yes). Warsh will formally take over as chair today. Warsh’s path to approval had been complicated for months by a criminal investigation by the Justice Department in connection with Powell’s testimony last year on the Fed’s renovation of its facilities. Senator Thom Tillis (R-NC), whose vote was needed to approve Warsh’s nomination out of the Banking Committee, had said he wouldn’t clear any Fed nominees until the threat of the DOJ’s investigation was lifted. Warsh’s nomination was able to move forward with Senator Tillis’s support once the DOJ dropped its investigation last month. Chairman Warsh will take the reins at a tricky time with both rising inflation and some signs of softening economic fundamentals. He also will need to develop consensus within the Federal Reserve while contending with a President who has been aggressive in calling for rate cuts and criticizing the Fed for its conduct of monetary policy. Adding further intrigue will be the dynamics around Powell staying on the Fed board as a governor and a pending Supreme Court case on the president’s authority to remove Fed governors. Chairman Warsh will have his work cut out for him navigating the Fed through these choppy waters.

Gas Tax.

The prospect of a temporary suspension of the 18.4 cent per gallon tax on gas received a boost from President Trump this week. The tax is dedicated to funding highway and transit projects. A suspension would cost the federal government about a half a billion dollars in revenue per week. The call comes as lawmakers develop a bill to reauthorize highway and transit programs. We remain skeptical that the gas tax will be suspended, but the President’s support gives it some new life.

Highway Bill Momentum.

The House Transportation committee is looking to pass legislation to reauthorize funding for major highway, transit, and infrastructure programs before the current authorization expires September 30. The hope is to pass the bill out of committee next week, though timing could slip to June. Lawmakers will be grappling with how to address the long-term solvency of the Highway Trust Fund (HTF), the primary federal funding source for highway and surface transportation projects. The HTF has faced funding challenges for years as gas tax revenues have failed to keep pace with infrastructure spending needs. Congress has not raised the federal gas tax since 1993. The bill likely will include new fees on electric and hybrid vehicles, though EV fees are politically contentious and will not fully address the HTF’s broader structural funding gap. Even if the highway bill is soon passed by the Transportation Committee, it still faces a tough road ahead given that multiple committees have some jurisdiction and there is not much floor time left. While there is momentum in moving the highway bill forward, it still will need a big push from lawmakers to avoid a clean extension being the only viable option come the end of September.

E15.

The House this week passed legislation to allow the year-round nationwide sale of E15 gasoline, a higher-ethanol (15%) fuel blend backed by farm-state lawmakers and the biofuels industry. The bill passed 218-203, with 14 Democrats joining Republicans. It would allow the permanent sale of E15, which the EPA has permitted through waivers since 2022. The measure was decoupled from the broader farm bill that the House passed earlier this month following disagreements among Republicans over biofuel blending mandates and refinery exemptions. Proponents of the bill argue the measure would provide greater certainty for farmers and expand fuel options, while opponents warn the bill could raise compliance costs for refiners. The House’s passage of the bill marks a significant step forward after years of failed attempts, but it faces a dim path in the Senate.

Redistricting Sprint.

While Democrats had a good start to the year on the redistricting front, that’s mostly fallen away over the past few weeks. The combination of the Supreme Court’s decision to modify the interpretation of Section 2 of the Voting Rights Act, Florida’s aggressive redistricting, and the Virginia Supreme Court overturning the newly-established Democratic maps has tilted the redistricting battle back towards Republicans. Republicans are expected to gain seats from redistricting in Alabama, Florida, Missouri, Louisiana, North Carolina, Ohio, Tennessee, and Texas while Democrats are expected to net seats from redistricting in California and Utah. All told Republicans appear on track to net 6-10 seats from redistricting this election cycle, making Democrats’ goal of retaking the House harder than just the current three seat minority they currently have. Republicans’ redistricting wins may not be enough to allow them to keep control of the House this November, but it does mean that the midterm results will be closer than they looked to be a month ago.