Major Budget Deal Comes Into Focus; New Fed Nominee
Author: Greg Valliere
May 22, 2019
MIRACLE IN MAY? Congressional budget brawls have become so dysfunctional — usually just before Christmas — that leaders are determined to pass major legislation in the next several days. This is a big deal, with big implications:
First, it appears that both parties are close to agreement on lifting so-called budget caps, which — if not changed — would impose huge cuts on defense in fiscal 2020 ($71 billion) and domestic spending ($55 billion). Lawmakers are still arguing over details, but more spending, not less, for both seems inevitable in what may be a two-year deal.
Second, the threat of a long government shutdown in late fall would be eliminated by the deal. Republicans were badly bruised by last winter’s shutdown, and they don’t want a repeat.
Third, there’s a decent chance that an increase in the federal debt ceiling would be included in this package, eliminating the threat of a government debt default crisis in October. Some lawmakers want this in a separate bill, but including it in a budget compromise is on the table.
THERE’S A POTENTIAL SNAG: Even more spending, in the face of an annual deficit of close to $1 trillion, will infuriate GOP deficit hawks in the House, and they could rebel (so could Donald Trump, for that matter). But they want a huge defense spending increase, and may be forced to swallow the domestic spending hikes.
WITH DEFENSE OUTLAYS SOARING toward $750 billion annually in the next year or two, there eventually will be a movement to slow this trend, but we don’t see it now. A budget deal is coming — Mitch McConnell and Nancy Pelosi are determined to get it done — and the big macro trend continues to be more fiscal stimulus, more spending on defense, infrastructure, space, border security, you name it.
MODERN MONETARY THEORY — which seemingly dismisses the threat posed by deficits when interest rates are low and demand for Treasuries is strong — is a very seductive concept in a city as profligate as Washington. Sure, there could be consequences in the next decade, but most of the policymakers who are spending furiously will be at the beach by then; others will have to clean up the mess.
NEW FED NOMINEE: The White House is floating a trial balloon for a Fed governorship — conservative economist Judy Shelton, a strong Trump supporter who has been critical of Fed policies. Shelton’s controversial views on issues such as the gold standard will get a thorough airing by Congress during the vetting process, but we think she would win confirmation.
AFTER THE TRAIN WRECKS with Herman Cain and Stephen Moore, “at least she’s not a misogynist,” a Fed source quipped to us yesterday. Shelton is an outspoken gadfly who might shake up the Fed a little, and maybe that’s a good thing. Lawmakers are looking for an easy vote after the two train wrecks, and we think Shelton would win near-unanimous support from Republicans, with backing from a handful of Democrats.
HIGHLY RECOMMENDED READING: We don’t always agree with New York Times columnist Thomas Friedman, but we strongly recommend his column this morning. Beijing’s behavior has been so egregious that “it took a human wrecking ball like Trump to get China’s attention,” he wrote. This underscores an under-appreciated angle — many U.S. liberals want to crack down on the Chinese; Trump has surprising bipartisan support on this issue.
The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), Highstreet Asset Management Inc. (Highstreet), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI and Highstreet are registered as portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
For further information, please visit AGF.com.
© 2019 AGF Management Limited. All rights reserved.