Senate Parliamentarian Throws a Hand Grenade; The Fed Begins Asset Sales

by Greg Valliere, AGF Management Ltd.

THE ABILITY OF CHUCK SCHUMER AND DEMOCRATS to use the budget reconciliation process repeatedly this year to jam spending and tax hikes through Congress has suffered a major complication — reconciliation has its limits, according to the Senate’s parliamentarian, whose judgments are considered binding.

THE MOST POWERFUL PERSON IN WASHINGTON may be Elizabeth MacDonough, the Parliamentarian who has ruled that the reconciliation process cannot be used repeatedly; it already has been used once, for the $1.9 trillion pandemic aid bill that was enacted two months ago.

THE CLEAR IMPLICATION from MacDonough is that the Democrats may get only one more chance this year, which puts even more pressure on President Biden to get a negotiated settlement this month on an infrastructure deal, saving reconciliation for a second spending bill or for tax hikes.

FURTHER COMPLICATING THE FISCAL OUTLOOK, MacDonough asserted that a reconciliation bill should first go through the Senate Budget Committee, which is evenly divided between the two parties and could debate for weeks before reporting out a bill.

THERE’S A “POTENTIAL FOR ABUSE” in the reconciliation process, she declared, which allows passage of budget-related bills with only 50 votes, not the 60 that is required because of filibuster rules. “Overuse and over-reliance on a hyper-fast track procedure in the ordinarily deliberative Senate will change the culture of the institution to the detriment of the committee and amendment processes and the rights of all Senators.”

DEMOCRATS SUFFERED ANOTHER SETBACK this week, as the chairman of the House Agriculture Committee proclaimed that the Biden Administration’s plan to increase taxation on inherited property is “untenable.”

OPPOSITION TO ELIMINATING THE “STEP UP” BASIS is growing. Rep. David Scott of Georgia, an African-American moderate, echoed other Democrats — especially those from farm states — who are not on board yet with the Biden tax plan. This reinforces our view that it may be autumn before a tax measure comes into focus.
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THE FIRST TENTATIVE SIGN that the Federal Reserve is becoming slightly less accommodative came yesterday, when the central bankers announced they would sell $13.8 billion worth of corporate bonds they bought at the height of the pandemic and the market volatility 15 months ago.

THE DOLLAR AMOUNT is a virtual rounding error in the Fed’s massive portfolio, or as a percentage of the corporate bond market, estimated at $10 trillion in size. The dollar amount isn’t the issue — rather, this is a signal that the Fed is beginning to lighten up its assets as the economy grows.

PERHAPS TRYING OUT LANGUAGE for the inevitable tapering of $120 billion of monthly purchases of Treasuries and mortgage-backed securities, the Fed declared yesterday that “sales will be gradual and orderly, and will aim to minimize the potential for any adverse impact on market functioning by taking into account daily liquidity and trading conditions for exchange traded funds and corporate bonds.”

WE MAY HEAR SIMILAR RHETORIC when the the Fed begins to taper. The central bankers Fed surely will discuss this in the coming months, with the first tentative tapering coming by winter, as long as economic data — such as tomorrow’s jobs report — show continued expansion.

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This post was first published at the AGF Perspectives Blog.