The economic stakes of the midterms

Nov 08, 2022

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It's Election Day — Voters are heading to the polls with inflation and the economy top of mind. The lawmakers they choose will face myriad economic policy challenges next year, from higher interest rates to a potential recession to a looming debt ceiling showdown.

From your MM host and our Victoria Guida: "The next Congress's ability to tackle those issues depends on which party controls each chamber, as well as on how significantly the economic outlook deteriorates. And their success or failure will shape an even bigger political contest that will soon heat up — the 2024 presidential race."

Among the key challenges:

Recession response — If the economy heads south next year, Congress won't be able to rely on the usual tools to cushion the blow, such as flooding the economy with stimulus checks or other broad financial aid, which could exacerbate inflation. Instead, lawmakers will likely need to offset any relief spending with tax increases or spending cuts to avoid adding to deficits.

"Failing to do so could rattle financial markets wary of policies that could undercut the Fed, or worse, lead the central bank to raise rates even higher. That's a difficult hurdle even when the president's party controls both chambers."

Debt deadline — Congress will need to raise the federal borrowing limit at some point in 2023. That process would be much harder if Republicans take one or both chambers, and senior Biden administration officials and allies are exploring potential strategies to raise the ceiling during the lame duck session, our Adam Cancryn reported.

A key question: Will Senate Minority Leader Mitch McConnell be willing to negotiate on a bipartisan deal?

Rohit Kumar, a former top McConnell aide during the Obama debt ceiling battles and a principal at PricewaterhouseCoopers, says he thinks the answer is yes, adding that the Republican leader's views on the matter have evolved since 2011. "There's not actually a lot of leverage here, because at the end of the day everyone knows you can't actually carry through on your threat," Kumar said.

Any bipartisan agreement to raise the debt ceiling in the lame duck, Kumar said, would need to be part of a broader deal on government spending, which is set to expire Dec. 16. (He dismissed as "pure fan fiction" suggestions that Democrats might advance a debt ceiling increase via reconciliation.)

Turning to technocrats — Lawmakers from both parties will continue to keep a close eye on how effective the Federal Reserve is at reining in inflation. If Republicans take control of Congress, they'll keep up their attacks on the Biden administration, which they say caused this burst of inflation by overspending. But Fed Chair Jerome Powell could begin to get more heat from GOP lawmakers if unemployment rises and they don't see progress on inflation — a return to the dreaded stagflation of the 1970s.

Oversight generally would also ramp up under Republicans, particularly of Securities and Exchange Commission Chair Gary Gensler's sweeping overhaul of Wall Street rules and of Consumer Financial Protection Bureau Director Rohit Chopra's crackdown on big tech and finance firms.

Also on the agenda — The growth in cryptocurrencies, and the lack of legal clarity around how they should be regulated, has captured the attention of lawmakers on both sides of the aisle, all but guaranteeing that these digital assets will be in focus no matter who is in power.

Midterm elections also typically bring administration turnover, and the White House will likely have to find nominees to fill some vacancies. If Republicans take control of the Senate, the type of candidate who can be confirmed will narrow considerably, though the upper chamber could be closely divided regardless of who comes out on top.

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Driving the Day

IT'S INFLATION, STUPID — Bloomberg's Nancy Cook: "After months of talk about reproductive rights, threats to democracy, climate change, immigration and crime, the US midterm elections are coming down to the way Americans feel about the overall state of the economy and, in particular, inflation.

"The last time voters called inflation the top issue during an election year was in August 1982, says Jeff Jones, a senior editor of the Gallup Poll. Back then, the country was in the grips of a deepening recession and a Republican was in the White House. This time around, 'inflation has been up there as a top issue all year,' Jones says."

FEE DRAG — As soaring interest rates batter the housing market , Sen. Tommy Tuberville (R-Ala.) urged Federal Housing Finance Agency Director Sandra Thompson "to take all steps within your power" to reduce fees and streamline internal processes to generate savings for homebuyers.

NEW SEC CHIEF OF STAFF — Our Declan Harty: "Amanda Fischer, a veteran of Capitol Hill who is senior counsel to SEC Chair Gary Gensler, will take over as the agency's chief of staff at the end of the year when Prashant Yerramalli steps down, the SEC said Monday."

KEEP A TOEHOLD — Bloomberg's Hannah Levitt and Jennifer Surane: "Behind the scenes, the Treasury and State Departments have urged banking giants including JPMorgan and Citigroup to keep doing business with certain strategic Russian firms, according to people familiar with the situation. The quiet effort is part of the administration's push to minimize adverse impacts of the sanctions regime designed to punish Russia."

Regulatory Corner

SHAKY — POLITICO's Josh Sisco and Declan Harty: "Conservative Supreme Court justices on Monday seemed sympathetic to letting companies challenge SEC and FTC enforcement actions prior to the agencies' rulings, during arguments for two cases that could curb how the agencies police corporate America … A ruling against the agencies could crimp how they pursue penalties against Wall Street firms and execute antitrust cases."

OVERDRAFT SLOWDOWN — A new paper from the Brookings Institution takes a closer look at how banks have changed their overdraft policies . Senior fellow Aaron Klein writes: "After decades of racking up major profits off overdrafts, many banks, including most of the largest banks, have announced sweeping changes that will sharply reduce costs for their customers—by my calculations, the combined savings already announced add up to about $5 billion a year, changes so large that even President Biden noticed and tried to take some credit . But in reality, this turnabout came without new legislation or regulation."

Economy

CHICAGO'S NOT THE ONLY ONE IN DEEP DISH — Bloomberg's Mackenzie Hawkins and Jennah Haque: "The spending plan closes a $128 million hole in the corporate fund, which pays for everything from law enforcement to tree trimming. The projected 2023 deficit is Chicago's smallest since 2019, but that gap is expected to widen to $473.8 million in 2024 and $553.7 million in 2025 , driven primarily by pension obligations."

FED STILL FEELING LONG COVID — WSJ's By Gwynn Guilford and Lauren Weber: "In the average month this year, nearly 630,000 more workers missed at least a week of work because of illness than in the years before the pandemic, according to Labor Department data. That is a reduction in workers equal to about 0.4 percent of the labor force … 'That may sound tiny, but having that persistent difference over a period of two and a half years is a big deal,' said Jason Faberman, senior economist at the Federal Reserve Bank of Chicago."

Crypto

OPEN FIRE — Bloomberg's Philip Lagerkranser, Emily Nicolle, and Sidhartha Shukla: "Simmering tensions between the crypto industry's two richest executives are spilling over into the already battered digital-asset market. On Sunday, Zhao 'CZ' Changpeng, the billionaire chief executive of Binance Holdings Ltd. took to Twitter to announce plans to sell Binance's roughly $530 million holding of FTT , the native token of Sam Bankman-Fried's FTX."

MEANWHILE — From Reuters's Angus Berwick and Tom Wilson: "Crypto giant Binance has processed Iranian transactions with a value of $8 billion since 2018 despite U.S. sanctions intended to cut Iran off from the global financial system, blockchain data show. Almost all the funds, some $7.8 billion, flowed between Binance and Iran's largest crypto exchange, Nobitex, according to a review of data from leading U.S. blockchain researcher Chainalysis. Nobitex offers guidance on its website on how to skirt sanctions."

RECORD SEIZURE — Bloomberg's Ava Benny-Morrison: "Manhattan prosecutors say they seized almost $3.4 billion in Bitcoin from a property developer who scammed the dark web marketplace Silk Road over a decade ago."

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Fly Around

Chinese leaders are considering steps toward reopening after nearly three years of tough pandemic restrictions but are proceeding slowly and have set no timeline, according to people familiar with the discussions. — WSJ's Keith Zhai

The U.N. secretary general, António Guterres, set the tone for the annual United Nations-led international climate talks, which officially began on Sunday as the accumulating threats of war, warming and economic crisis take a toll on every continent, hitting the world's most vulnerable people the hardest. " We are in the fight of our lives, and we are losing ," Mr. Guterres said. — NYT's Somini Sengupta and Jenny Gross

China's exports to the rest of the world shrank unexpectedly in October, a sign that global trade is in sharp retreat as consumers and businesses cut back spending in response to central banks' aggressive moves to tame inflation. — WSJ's Jason Douglas

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