The Odds of a Government Shutdown Just Shot Up

House Appropriations Chair Kay Granger
SIPA USA
By Yuval Rosenberg

Happy Tuesday! We’re guessing you’ve heard this, but former President Donald Trump pleaded not guilty in a Miami courtroom today to all 37 charges he faces related to his keeping of top secret documents. Here’s what else we’re watching.

The Odds of a Government Shutdown Just Shot Up

House Republicans reached an agreement Monday to end a blockade of legislative action by roughly a dozen far-right lawmakers. In the process, House Speaker Kevin McCarthy may have ensured a more difficult fight later this year over federal spending levels — and may have increased the chances of a government shutdown.

The Republican rebels effectively shut down proceedings on the House floor last week in anger over the deal McCarthy had cut with the White House to suspend the debt limit, and the deal-making process the speaker had used. The GOP hardliners were upset, in part, that the agreement did not cut spending to fiscal year 2022 levels as they had wanted.

Republicans’ lower spending targets: After the hardliners unexpectedly brought House floor proceedings to a halt last week, McCarthy said that he would be open to setting spending levels below the caps in his deal with the White House, enacted into law as the Fiscal Responsibility Act of 2023.

Sure enough, as the full House Appropriations Committee this week begins to work through the 12 annual spending bills, Rep. Kay Granger of Texas, the committee chair, announced Monday that non-defense spending bills would be written below the levels in the debt limit deal — a concession that The Washington Post’s Marianna Sotomayor and Leigh Ann Caldwell call “a clear indication that McCarthy is attempting to appease the far-right rebels.”

“The Fiscal Responsibility Act set a topline spending cap — a ceiling, not a floor — for Fiscal Year 2024 bills,” Granger said in a statement. “That is why I will use this opportunity to mark up appropriations bills that limit new spending to the Fiscal Year 2022 topline level. In addition, by clawing back $115 billion in unnecessary, partisan programs, we will re-focus government spending consistent with Republican priorities, keeping total spending 1% lower than if we were operating under a continuing resolution.”

The subcommittee allocations Granger put forth Monday total $1.471 trillion, which is $119 billion less than the spending caps negotiated by McCarthy and Biden and $131 billion less than the current fiscal year, CQ Roll Call’s Aidan Quigley reports.

“All of those reductions would be on the nondefense side of the ledger, as military and security-related spending would meet the law's $886 billion cap under Granger's plan,” Quigley writes. “Regular nondefense appropriations would face deeper cuts — $159 billion below fiscal 2023 — to make up for the increases to the Pentagon and related accounts. And within nondefense totals, veterans and border security funds would receive slight increases, concentrating the pain on other domestic and foreign aid programs.”

See the CQ Roll Call table below for details about the size of the proposed cuts before any additional offsetting funds.

Clawing back the $115 billion in unspent funds as Granger said she intends to do would bring spending levels back closer to the $1.59 trillion cap in the debt ceiling law, Quigley adds: “Where all of that $115 billion will go hasn't yet been specified. But sources familiar with the planning say it is likely to come from the IRS, EPA, Agriculture Department and other agencies that got hefty increases in the last Congress, which in turn would allow fiscal 2024 additions to bills above their base allocations.”

Why it matters: The spending levels Republicans laid out may raise some hackles among moderates and defense hawks in the GOP — and they certainly will not mesh with the spending levels that Democrats want or will pass out of the Senate. That is likely to make it harder for the House and Senate to agree on the annual spending bills — or, depending on where spending levels end up, it could once again prompt a conservative revolt or result in a government shutdown. The McCarthy-Biden debt limit deal also includes a provision that requires a 1% across-the-board spending cut from fiscal 2023 levels if all 12 appropriations bills aren’t enacted by the end of the year.

Rep. Rosa DeLauro of Connecticut, the top Democrat on the House Appropriations Committee, said Republicans were going back on their deal with Biden. “With the toplines released last night, Republicans are flouting the law of the land. They are disregarding the letter and spirit of the agreement between the president and the speaker of the House,” she said during a markup session Tuesday. She also warned: “If we disregard the law of the land, we all but guarantee a shutdown in October.”

Inflation Cools as Fed Mulls Pause in Rate Hikes

Consumer prices in May registered their smallest increase in more than two years, sending a dovish signal to Federal Reserve officials as they contemplate pausing their campaign to bring inflation under control by raising interest rates.

The consumer price index rose by 4% on an annual basis and 0.1% on a monthly basis, the Bureau of Labor Statistics reported Tuesday, with both numbers lower than the month before, showing that inflation continues to decelerate overall.

Looking under the hood, though, the data are a bit more ambiguous. While the headline number has now fallen to about half its peak of 9.1% recorded in June 2022, core inflation — a measure that ignores volatile food and fuel prices — continues to run hot, registering 5.3% on an annual basis. The monthly core figure was 0.4%, which is the same as the monthly average for the measure so far this year, suggesting that core inflation may be stuck in a rut, and at a fairly high level.

Good news, with questions: The White House applauded the report. “Annual inflation is now at the lowest level since March 2021, and less than half of what it was last June,” President Joe Biden said in a statement. “After gas and grocery prices increased rapidly last year due to the war in Ukraine, inflation has fallen for 11 months in a row.”

Analyst Peter Boockvar of the Bleakley Financial Group highlighted some of the ambiguous details that suggest the path back to the Fed’s inflation target of 2% may not be so easy. “The bigger question for inflation is: Where is it going? Where does it settle out?” he said, per The Washington Post. “Are we just going to go back to this 1-to-2 percent inflation trend that we got so used to? Or is there something so structural that after the spike, after the comedown, are we going to settle at 3 [percent]?”

Hawks vs. doves: The latest data provide ammunition for both inflation hawks, who want the Fed to press ahead in its effort to slow the economy by continuing to raise interest rates, and doves, who want the Fed to pause if not end its rate-hike campaign as inflation continues to ease. Fed officials will announce their next move on interest rates on Wednesday, at the conclusion of the June meeting of the Federal Open Market Committee.

Michael Strain, an economist at the conservative American Enterprise Institute, said the report shows that the Fed’s “job is clearly not done,” with both core inflation and the job market running too hot. “The Fed has to decide which mistake it is most comfortable making: hiking too far or not hiking far enough,” Strain wrote. “In my view, the former is the better mistake to make. Hike in June.”

Jason Furman, who chaired the Council of Economic Advisers under President Obama, said the inflation report is unlikely to change Fed officials’ minds when it comes to an expected pause at the June meeting — but it should. “The Fed has strongly telegraphed a pause/skip & nothing about this will change that,” Furman tweeted. “But is mildly unfortunate. Over the last 3 months core CPI is 5.0% annual rate. The employment mandate is fine with 283K jobs per month. Both much hotter than expected. Ought to raise now.”

Michael Pugliese, a senior economist with Wells Fargo in New York, told Reuters that he thinks inflation is clearly coming down, but the Fed will likely have to hold rates at their current relatively high level for some time. "We expect a more noticeable deceleration in core prices in the coming months," he told Reuters. "That said, directional progress should not be confused with mission accomplished. There is a lot of ground to cover in the inflation fight, which should keep the Fed from cutting rates until 2024.”

And Jamie Cox, managing partner at Harris Financial Group, said in a note to clients that the latest data suggest the Fed is likely done with its rate hikes. “This CPI report is everything the Fed needs to pause — there is deflation and/or disinflation in every category,” he wrote, per Bloomberg. “If this trajectory holds in June, the need for further tightening is behind us.”

The bottom line: Inflation is declining, but it’s not clear how long it will take to return to pre-pandemic levels — or even if it will do so anytime soon.

Number of the Day: $2.2 Million

It takes a net worth far above $1 million for Americans to be considered wealthy these days, according to a survey by brokerage firm Charles Schwab. When asked how much it takes to be seen as wealthy, the average of 1,000 responses was $2.2 million.

But being wealthy and feeling wealthy are not the same, according to Schwab’s 2023 Modern Wealth Survey. Nearly half of those surveyed, 48%, reported that they already feel wealthy, even though their net worth averaged only $560,000. “Americans today aren’t as worried about keeping up with the Joneses, and more importantly, they understand that they can be happier with fulfilling experiences and relationships, even if they have less money than them,” said Jonathan Craig, Charles Schwab’s head of investor services.

The survey found that 62% of adults say “enjoying healthy relationships with loved ones” better defines what wealth means to them compared with 38% who pointed to having a lot of money. Seven in 10 survey respondents said wealth means not having to stress about money or enjoying experiences more than owning nice things.

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