Washington’s Week Ahead: Build Back Better Isn’t Dead Yet…
Welcome back from the holidays, and Happy New Year! Washington is slowly coming back to work this week. The Senate is back in session today, but the House of Representatives remains out until next week. We want to lay out what we believe markets will be focused on this week and for the coming few weeks:
"Build Back Better" (BBB) is NOT dead: Despite the headlines just before Christmas that Senator Joe Manchin (D-WV) is officially opposed to and thus killed off President Biden's signature social spending and tax package, we beg to differ. Talks between Manchin and the White House continued intermittently over the Christmas break, and we expect them to continue this week. We believe the deal - currently hovering at approximately the $1.8 trillion - is (as we have been saying for months) a "Must-Do/Failure is Not an Option" event for Democrats going into the November mid-term elections.
How best to describe the situation? Maybe a cooking analogy works best: While BBB may not be on the front burner day after day like it has been the last few months, it definitely is on a side burner simmering away and being tended to carefully.
Three key points to keep in mind:
1. Manchin is opposed to the size/scope of the social spending components of BBB – and that can be negotiated. He is not opposed to the substantial personal and corporate tax increases. Specifically, Manchin tells the White House and Senate Democratic leadership he wants the enhanced child tax credit either removed from the bill or significantly lowered. Manchin argues the actual cost of the child tax credit is closer to $4 trillion over ten years (we think he's right as the current draft only expenses the provision for three years). Manchin has indicated numerous times he was comfortable with a package coming in at $1.5 trillion.
But back to Manchin on taxes for a moment: He has expressed little to no concern or opposition with the numerous tax provisions in the bill. In fact, Manchin has been vocal in supporting President Biden's position "the rich need to pay their fair share" and that the corporate tax rates should also be raised. If a deal on BBB comes together in the next two to three months, do not be surprised if the effective date for those taxes set to January 1st.
2. Manchin's concerns/stated opposition (for now) revolve around inflation and adding to the national deficit in the face of the Federal Reserve raising interest rates. If inflation does begin to show itself as truly "transitory" (Washington's 2021 buzz word of the year), and there is a more precise, smoother glide path to the timing and size of Federal Reserve rate increases, do not be surprised if Manchin changes his mind.
3. To our point of this being a “Must Do/Failure is Not an Option”: That “ding-ding-ding” you heard on midnight December 31st was not just the ringing in of a new year. It was also the starting bell for the re-election campaigns for every member of the House and one-third of the Senate. For Democrats, failing on BBB would leave them open to being attacked for getting very little accomplished in the previous two years. There is no other “Big Ticket” issue Democrats intend – at this point – to tackle in 2022. For many Democrats, the fate of BBB is intricately tied to their political futures. Thus, do not be surprised if a deal is cobbled together by March.
What will Congress be focusing on until (or in the absence of) the BBB deal being hammered out?: The first big issue will be Senate consideration of a voting rights bill – which Republicans uniformly oppose. But this brings us to the likely next major legislative battle: Getting rid of the Senate filibuster or at least cutting back how it can be used. Senate Majority Leader Chuck Schumer (D-NY) has been pushing to get rid of the filibuster and sees the voting rights bill as the leverage to at least change the rules how the filibuster is used. We see at least five Democratic senators – chief among them Senators Joe Manchin (D-WV) and Kristen Sinema (D-AZ) – opposed to scrapping the filibuster but maybe open to changing the rules. Any changes to the filibuster would likely change the legislative outlook for the remainder of 2022 considerably.
Markets should be on alert as we anticipate President Biden will finally announce his long-awaited nomination for Vice Chair for Supervision of the Federal Reserve possibly as soon as this week – the single most powerful financial regulatory post in the federal regulatory orbit. Progressive Democrats are pushing President Biden hard to name a Progressive who will bring tough new regulations and enforcement oversite to the banking sector and the larger players in the mutual fund and insurance industries. Additionally, the President will likely name two additional Federal Reserve Board Governors – thus allowing President Biden to almost wholly remake the composition of the Federal Reserve Board.
There is a long list of rumored names for the Vice Chair for Supervision slot but for the moment the leading name appears be former Federal Reserve Board Governor and Deputy Treasury Secretary Sarah Bloom Raskin. Currently a professor at Duke Law School, Raskin appears to meet the approval of Progressives and is well known to President Biden from her tenure at Treasury during the Obama Administration. If the name Raskin sounds familiar to you political junkies: Her husband, Representative Jamie Raskin (D-MD), was the lead impeachment manager for the second impeachment of President Trump.
Finally, are we about to see the “The Rise of the Regulators”?: We will be writing a lot more about this in the coming weeks but in short we anticipate a lot more regulatory actions in January impacting virtually all sectors. Our view and experience is this: It normally takes a new Administration’s regulatory appointments the better part of a year to get settled in and lay out their agenda. And in the second year, they begin to execute. Two examples of what we are watching closely:
Securities and Exchange Commission Chair Gary Gensler laid out a particularly broad and aggressive regulatory agenda in 2021. We now anticipate he will quicken effort to bring new, meaningful regulations impacting a number of key markets ranging from cryptocurrency regulation to corporate governance rules around sustainability to the market structure of the bond market.
The Federal Trade Commission (FTC) and the US Department of Justice’s (DoJ) Antitrust Division are seen as the “point of the spear” of President Biden’s ambitious executive order on competition. FTC Chair Lina Kahn is seen as particularly aggressive in her views on large mergers and acquisitions of any kind. Add to this expected legal actions from DoJ Assistant Attorney General Johnathan Kanter aimed at Big Tech. Overall, we anticipate soon seeing sweeping (and likely controversial) efforts from both impacting deal-making across all sectors.
We hope this is helpful. Please let me know if you have any questions.