The fiscal drama continued over the weekend. Recall that last week President Donald Trump adamantly declared that spending talks were dead. Within hours though he was backtracking, soon claiming that he wanted an event bigger deal. It should be obvious as this point that Trump wants a deal, he doesn’t care how much it costs, and he isn’t getting his way. Senate Majority Leader Mitch McConnell just hasn’t been willing to expend the political capital on a deal, a reality that has been evident all summer long. Republicans appear to be positioning themselves for post-Trump world. This may have ramifications for the Fed.
The Wall Street Journal describes the current impasse:
Democrats criticized the nearly $1.9 trillion offer from Treasury Secretary Steven Mnuchin as insufficient, particularly in its funding and strategy for coronavirus testing and tracing. Senate Republicans, meanwhile, balked at the offer’s cost and its proposed expansion of the Affordable Care Act. The concerns from both sides of the Capitol lowered expectations that had risen Friday when President Trump approved the most generous GOP offer to date in the negotiations.
Trump claims that House Majority Leader Nancy Pelosi is the roadblock to a deal. The bigger roadblock though is McConnell who said that he thinks a deal is “unlikely” before the election. There is a contingent in the Senate that adamantly opposes a large package, especially one the includes expanded aid for the ACA. Via Politico:
Sen. John Barrasso (R-Wyo.) said that giving into Pelosi on anything seen as expansion of Obamacare in the next recovery bill will be seen as “an enormous betrayal by our supporters,” according to people familiar with the call.
The situation remains that McConnell has to be willing to twist arms on the far-right side of his caucus or accept a bill that has more Democratic support than Republican. I haven’t yet seen evidence that he is interested in either option. McConnell might rightfully sense that a fiscal package at this point won’t improve Trump’s chances in the election; realistically, they won’t get any checks out the door before November and people are already voting. He would rather retreat to conservative fiscal principles and, if his party holds the Senate, deny Democratic presidential candidate Joe Biden the economic boost from a big package.
If Trump had half the negotiating skills he claims to have, he would hold up the nomination of Amy Coney Barrett for the Supreme Court in return for a large stimulus package. But I don’t see that happening. What instead I see happening is lots of headlines about stimulus negotiations between Pelosi and Treasury Secretary Steve Mnuchin that amount to nothing while McConnell busies himself with filling the open spot on the Supreme Court.
Meanwhile, the Fed continues to push for more fiscal support. Last week, Federal Reserve Chair Jerome Powell again pleaded for more fiscal stimulus:
The expansion is still far from complete. At this early stage, I would argue that the risks of policy intervention are still asymmetric. Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses. Over time, household insolvencies and business bankruptcies would rise, harming the productive capacity of the economy, and holding back wage growth. By contrast, the risks of overdoing it seem, for now, to be smaller. Even if policy actions ultimately prove to be greater than needed, they will not go to waste. The recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side by side to provide support to the economy until it is clearly out of the woods.
This weekend Minneapolis Federal Reserve President Neel Kashkari further ramped up the rhetoric. Via Bloomberg:
The U.S. economic recovery has “flattened out” and is in vital need additional support from fiscal policy, said Federal Reserve Bank of Minneapolis President Neel Kashkari.
“We’re going to continue to see a grinding, very slow recovery, with thousands of small businesses around the country going bankrupt,” Kashkari said in an interview Sunday on CBS’s Face the Nation. “That’s why it’s so vital that our elected leaders come together to take more action.”
I don’t think the recovery has “flattened out.” The pace will obviously slow relative to the third quarter but in the absence of a large shock (I think another nationwide shutdown is very unlikely) I do not expect the recovery will end spontaneously. At times it seems the Fed is working from an odd theory of the business cycle where endogenous double-dip recessions are the norm while at other times simply making the correct observation that mitigating the growing inequality caused by the recession requires additional fiscal policy. That’s though a topic for later this week. For now, I will leave it at that there is a very compelling case for additional fiscal aid to the economy but market participants should not be surprised if the economy continues to grow in the absence of that aid.
The Politico report referred to earlier contained this little gem:
Several Republicans also criticized Federal Reserve Board chairman Jay Powell, who has pushed for more stimulus.
Powell said nothing new this past week, but the politics are shifting under his feet. With Trump pushing for low interest rates and more fiscal stimulus, the Fed felt confident edging onto Congress’ turf. In a post-Trump world, Republicans are likely to revert to their typical tight fiscal, hard money stance (I am sure it is only a matter of time before Federal Reserve nominee Judy Shelton reverts to her gold standard roots). The Fed will return to being everyone’s favorite punching bag.
Bottom Line: I am skeptical that the fiscal stimulus talks dominating headlines will amount to any actual stimulus. Those talks, however, serve a purpose as they distract Democrats while McConnell pushes forward with the effort to fill the Supreme Court spot. I don’t expect the economy to go into reverse without more aid, but that more aid would certainly speed the recovery. The Fed will likely once again face hostility from conservatives in a post-Trump world.