Washington Week Ahead: February 7, 2022

Both the House of Representatives and Senate are in session this week. President Biden meets with German Chancellor Olaf Scholz today (Monday) to discuss strategy on dealing with Russia and the imminent threat of invasion of Ukraine. 

Last week, the Senate failed to finalize draft Russian sanctions legislation. Democrats and Republicans are essentially in agreement on most of the provisions. Still, they cannot agree on whether to include sanctions on the Nord Stream II pipeline (Senate Republicans want to sanction the pipeline, Democrats are resisting to support President Biden’s decision last year not to sanction the pipeline – but a lot has obviously changed since then). We believe the meeting between President Biden and Chancellor Scholz today may offer a chance for a solution if Scholz agrees to shut off the gas pipeline if Russia invades.

Meanwhile, Congressional appropriations negotiations broke down – again – with the Federal Government facing a shutdown on February 18th.  Last week, House and Senate Congressional appropriation leaders had hoped to reach a breakthrough and get to critical mass on the 2022 budget. That all fell apart by the end of the week, and it turns out they are somehow now further apart than where they were this time last week. The sparring is over Democrats who want to expand social spending, which Republicans oppose, and Republicans wanting “parity” for defense spending with an increase in social spending.

Timing now gets dicey as the House is out of session next week, so our expectation is the House will once again pass a temporary stop-gap measure to keep the government running until the end of March (and the Senate voting for it shortly after it comes over from the House).

Last Friday, the House passed the mammoth America COMPETES Act, a bill aimed to help the US better compete with China on all things tech, including offering $52 billion in semiconductor development subsidies. The bill now is over with the Senate, which passed a similar bill - the United States Innovation and Competition Act - last June only to see it languish and effectively die in the House for various political reasons. From a global perspective, China has been racing ahead in its state-sponsored spending for technology research and development. The most recent data available is from 2018 and, as the nearby chart shows,  China is rapidly closing the gap the US. With Supply chain disruption and shortages in semiconductors, the situation has become more urgent for US competitiveness. From a domestic/political perspective, this is now a critical “must-do” for the White House and Democrats who desperately need a major legislative victory since the Build Back Better bill was (temporarily, we believe) shelved in December.

Investors should note that, like the Infrastructure bill passed last year, states are already aggressively stepping up to offer sizeable financial sweeteners to induce tech investment – something that will be quite formidable when Congress finally passes the COMPETES Act. We have been pointing to the recent announcement by Intel to build $20 billion in new chip manufacturing facilities in Ohio which offered $2 billion to assist Intel in construction costs. We see this as the “new intra-American Chip Race,” as virtually every state is already offering significant incentives to lure well-paying tech jobs.

Turning to the Federal Reserve, last week  Board Chair Jay Powell’s official tenure as chair expired last week. He was named “Chair pro-tempore” until he gets a confirmation vote by the Senate Banking Committee and then a final confirmation vote by the full Senate. For those Fed watchers wondering what the hold-up is, here is what is going on: Senate Banking Committee Chair Sherrod Brown (D-OH) has decided to hold Powell’s – and Lael Brainard’s Vice Chair for Monetary Affairs – confirmation together with the three other nominees (Sarah Bloom Raskin for Vice Chair for Supervision, and Lisa Cook and Phillip Jefferson for Fed Governorships.  Exactly why he is waiting to do this is unclear. Still, those worried something is going on behind the scenes regarding Powell’s confirmation, rest assured: We continue to believe Powell and Brainard will be confirmed by wide margins.  Cook and Jefferson will, we believe, too, be easily confirmed. Raskin, however, continues to face significant opposition as virtually every Republican Senator is likely to oppose her due to her past views on how the Fed could pressure banks to “de-bank” the oil and gas sector.

 This leads us to our final point: Democrats currently do not have 50 votes in the Senate, at least temporarily.  Early last week, news broke that Senator Ray Lujan (D-NM) had a stroke. Only 49 years old, Lujan is expected to recover but will be recovering at least four to six weeks until he can return to the Senate. That means Democrats only have 49 votes to the Republican 50, forcing Senate Majority Leader Chuck Schumer (D-NY) to carefully reconsider the timing and vote count for a significant number of pending pieces of legislation and presidential nominations.

 Please let us know if you have any questions.