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'Chaos' in the House

By Yuval Rosenberg and Michael Rainey
Thursday, June 8, 2023

Good Thursday evening! House Speaker Kevin McCarthy told reporters that he thinks he’s making progress in resolving a revolt by 11 far-right members of his own conference, but there’s little indication yet that a resolution is near. McCarthy yesterday dismissed lawmakers for the rest of the week after the conservatives brought legislative action to a halt in protest over the speaker’s debt limit dealmaking with President Joe Biden. The speaker acknowledged that he was "blindsided" by the revolt and that "there’s a little chaos going on" in his chamber. The question now is how long the chaos will continue.

Here's what we’re watching.

Deficit Hits $1.2 Trillion for First 8 Months of Fiscal 2023

The federal budget deficit was $236 billion in May, according to the Congressional Budget Office’s latest monthly estimate, bringing the total for the first eight months of the fiscal year to nearly $1.2 trillion. By comparison, the budget deficit in the first eight months of fiscal year 2022 was $426 billion — a difference of roughly $735 billion.

Federal revenues were 11% lower in the first eight months of fiscal year 2023 compared to a year earlier, with the shortfall driven largely by smaller-than-expected tax payments from individuals. As the Committee for a Responsible Federal Budget notes, "the recent temporary revenue surge has ended, with revenue falling from the near-record 19.6 percent of GDP in FY 2022 down to 17.2 percent of GDP over the past 12 months."

Outlays, on the other hand, were 9% higher compared to a year ago, pushing spending to 25.3% of GDP over the last 12 months.

The programs that saw big increases in spending include Social Security, in which spending rose by $85 billion (11%) compared to the same period a year earlier as more retires entered the system and a major cost-of-living adjustment took effect; Medicare, where outlays rose by $77 billion (17%); Medicaid, which saw a $31 billion (8%) increase as enrollment remained elevated due to temporary pandemic-era rule changes; and interest paid on the public debt, which rose by $112 billion (34%), driven by higher interest rates.

Over the past 12 months, the deficit totaled $2.1 trillion, a 50% increase from the 12-month deficit recorded a year earlier. As a share of the economy, deficits have averaged 8.1% of GDP over the last year, well above the historical average of 2.5%.

Quote of the Day: No Legislating, No Problem??

"When we pass things around here that are messaging bills that don’t do anything, is it really a loss that we aren’t passing anything?"

− Republican Rep. Scott Perry of Pennsylvania, leader of the ultraconservative House Freedom Caucus, as quoted by Max Cohen of Punchbowl News regarding the ongoing blockade of legislative action by 11 right-wing House members.

Republican leaders on Wednesday evening canceled the remaining votes for this week and adjourned until Monday after hardliners effectively blocked the House from taking up a group of bills for a second straight day in protest over House Speaker Kevin McCarthy’s debt limit deal with President Joe Biden.

"The embarrassing episode raises questions about the fate of an expected Ukraine aid package later this year and spending bills to keep the government running past Sept. 30 — all of which will require compromise with Democrats that will further divide his party," Bloomberg’s Billy House and Steven T. Dennis write.

With the standoff unresolved and different hardliners asking for different things, according to McCarthy, other Republicans were growing frustrated, The Washington Post reported: "Several governance-minded Republicans privately expressed their frustration that a small faction of their conference continues to hold up ‘the majority of the majority’ from doing their basic job in elected office and voting — with little optimism that things change when lawmakers return on Monday."

Wall Street Worries About a Flood of Treasury Borrowing

With the debt limit suspended until 2025, investors reportedly shifted from worrying about a potential debt default to worrying about a potential flood of about $1 trillion in new Treasury borrowing over the coming months as the U.S. government builds up its cash balance again, pushing interest rates higher and draining market liquidity.

"JPMorgan has estimated that Washington will need to borrow $1.1tn in short-dated Treasury bills by the end of 2023, with $850bn in net bill issuance over the next four months," The Financial Times reported Wednesday. "A principal concern voiced by analysts was that the sheer volume of new issuance would push up yields on government debt, sucking cash out of bank deposits." Smaller lenders in particular reportedly could feel the strain as yields rise and depositors look for better rates.

The Treasury Department said in guidance issued Wednesday that it "plans to increase issuance of Treasury bills to continue financing the government and to gradually rebuild the cash balance over time to a level more consistent with Treasury’s cash balance policy." It said it expects its cash balance to rise to about $425 billion at the end of June and reach $600 billion by the end of September. That pace should limit pressure on money market funds and bank reserves, Ernst & Young Chief Economist Gregory Daco said on Twitter.

There’s an increased cost for the government, too. The Wall Street Journal noted that current market and Federal Reserve dynamics mean that "the U.S. government could be stuck borrowing more than $1 trillion at rates approaching 6%." That’s up from 0.1% in the same market less than two years ago.

Some analysts also expect volatility ahead for Treasurys. "We’re running a significant budget deficit. We still have quantitative tightening. If we have a flood of T-bill issuance as well, we likely have turbulence in the Treasury market in the months ahead of us," Torsten Slok, chief economist at Apollo Global Management, told the FT.

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