This Week: The House approved three spending bills for certain government agencies for fiscal year 2019, which begins on October 1 (see below). The Senate approved various judicial nominations and began debate on the annual defense authorization bill.
Next Week: The House will vote on legislation to address the opioids epidemic. The Senate will continue to vote on judicial nominations and complete its work on the defense authorization bill.
Financial Services Issues
Reg Relief Reprise? With the regulatory relief bill signed into law, the process now moves to the regulators who will begin lengthy rulemaking processes to implement aspects of the legislation. One area that will keep the Federal Reserve in particular very busy is the application of the increase in the asset threshold (from $50 billion to $250 billion) at which bank holding companies are subject to heightened regulatory requirements. While banking entities with under $100 billion in assets have an automatic exemption, those with assets between $100 billion and $250 billion will face an 18 month transition period during which time the Fed will have discretionary authority to apply enhanced standards (they also still will be subject to certain Fed-conducted stress tests). Congress will keep a close eye on the implementation process, while House Republicans, led by Financial Services Committee Chairman Jeb Hensarling (R-TX), also begin to tee up a second regulatory relief bill focused on capital formation and markets issues that generally were not featured in the legislation just signed into law. A second bill will advance over the coming weeks in the House, but it is almost certain to fail in the Senate. There also are ongoing efforts to try to attach regulatory relief provisions to funding bills, but they also face serious headwinds in the Senate.
Other Issues in Play
Rising Gas Prices. Lawmakers and others in Washington have begun to take note of rising gas prices after an increase of nearly 60 cents (at the pump) from this time last year. Rising gas prices are an explosive (no pun intended) political issue since many voters use the price they pay at the pump as a barometer of the health of the economy. President Trump has touted strong economic gains as one of his accomplishments in office, but higher gas prices could blur that message for those voters who spend a lot of time behind the steering wheel. Democrats have started to criticize the Trump administration for the rise in prices. They argue that the President's foreign policy (specifically the withdrawal from the Iran nuclear agreement) has had a negative impact on oil supply and that the oil and gas industry was a big beneficiary of the Republican tax bill. Lawmakers will advocate for measures to address higher gas prices, including tapping the nation's oil reserves and addressing market speculation, but none of these measures will advance. Rising gas prices are a political football that will be tossed around in the run-up to the mid-term elections, and we will hear more about them as vacation (and driving) season nears. Don't expect anyone in Washington to come up with a silver bullet to solve the problem.
Trade Chaos. The Trump administration is learning that it's not easy to change the world's trading system. The administration’s actions on trade have generated a near-daily barrage of new developments, and all of them seem highly disruptive. While the long-term outcome of the administration’s ongoing negotiations is uncertain, the near-term pain projected by many US industries (and lawmakers) is palpable and suggestive that things are not off to a good start. It seems like nearly every country has a beef with the US on trade these days. The President’s negotiating strategy – to go big and shock his negotiating partners with major demands – seems miscast for global trade talks. Seeking more modest and incremental gains might work better and keep the volume down, but this is not the President's style. The G-7 meetings this weekend in Canada, which will include many of our top allies, will be telling. If the President wants to lower the volume of discontent, he could suspend all planned tariff increases on those countries' exports of steel and aluminum to the US. If he doesn't, the gloves are off and we don't know where this will lead.
Trump vs. Republicans on Trade. Senate Republicans have grown increasingly apprehensive about the Trump administration’s trade priorities and are taking new steps to reassert their authority to halt certain actions. This week, Senate Foreign Relations Committee Chairman Bob Corker (R-TN) floated a proposal to get congressional approval for the imposition of tariffs associated with Section 232 of the Trade Expansion Act of 1962. Section 232 tariffs can be triggered when national security considerations are cited and have been imposed by the administration in connection with steel and aluminum imports from many countries. Section 232 has not been used since the 1970s and national security grounds have never been invoked in a trade dispute since the creation of the World Trade Organization in 1995. Since national security concerns could be used to justify tariffs on almost any product by any country, there is concern that their application to steel and aluminum imports by the administration will create a slippery slope that undermines multi-national order and trade rules. The Corker measure will not pass, but it will force the administration to coordinate their trade policies more closely with congressional Republicans. More than any other policy issues, Republicans are nervous about Trump's views on trade and their contributions to potential election losses in November.
Less Fraught Funding. The annual appropriations process through which Congress funds the government has been broken for years. Instead of passing through an orderly process individual appropriations bills covering specific parts of government, Congress has had to resort to passing stop-gap measures to keep the government funded in order to buy time for the negotiation of one massive package of funding bills. In an era of hyper partisanship, these negotiations inevitably have featured threats of a government shutdown and sometimes an actual government shutdown. When President Trump signed such a behemoth bill into law in March, he vowed never to do so again. Indeed, as we’ve previously discussed, the administration still is working with Congressional Republicans through a specialized “rescissions” process to go back and cut spending from that law (the House passed its rescissions bill this week, which faces an uphill climb in the Senate). With a keen interest in avoiding the drama of a potential government shutdown in an election year, Congressional leaders are trying to separately advance somewhat smaller funding vehicles this year. The House kicked things off this week by passing a bill covering funding for variety of areas (including energy, military construction and veterans) and will follow up with a series of other bills over the next couple of months. The Senate, which has spent weeks trying to clear Presidential nominations, is further behind. With Majority Leader Mitch McConnell’s (R-KY) announcement that much of the body’s recess period is cancelled, the upper chamber may spend much of the dog days of summer approving funding bills.
Immigration Vote Close. Whether House Republican leaders bring their own bill for a vote or whether a vote on legislation is forced on them by a bipartisan group of members (through a procedural "discharge petition"), a House vote on controversial immigration measures seems inevitable in the next two months. Immigration reform can implicate dozens of issues, but the actual measures to be voted on soon most likely will focus on just a few, including a longer-term extension of the Deferred Action for Childhood Arrivals program (legal status for the "dreamers"), reforms to legal immigration programs to limit those allowed into the US through the "diversity lottery," and funding for more border security to curtail illegal immigration, which will include funding for the continuation of a border wall along the Southwest Border. The Senate tried but failed to work out a deal involving most of these issues last year. These are all highly-charged issues that will affect voter sentiment as we near the mid-term elections. We believe a bill extending DACA in exchange for some funding of the wall and other border security improvements is possible, but nothing more ambitious than this will be enacted. We give the odds of a bill passing at lower than 50-50, but the bill likely will have election implications regardless of the outcome.