This commentary was originally posted on April 8th.
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Members of Congress from both parties were among the many caught off guard by last week's Rose Garden tariff announcement. President Donald Trump announced that a universal 10% tariff on all imports would begin on April 5th. He also set higher tariffs, some as high as 50%, for about 90 countries with which the United States has a significant trade deficit. The plan stunned investors, with the S&P 500® index, Dow Jones Industrial Average and the Nasdaq composite all shedding roughly 10% over the final two days of last week.
Markets were volatile again on Monday, opening down sharply before rebounding on false news that the president was considering a 90-day pause in the tariffs. The White House has sent mixed signals about whether countries can negotiate their way to a lower rate, announcing that more than 50 countries have requested negotiations while also sending the message that eliminating trade deficits is the only way the tariffs will be lowered.
On Capitol Hill, seven Republican senators signed on to a bipartisan effort to reclaim congressional authority over tariffs. The plan won't go anywhere—and the president has announced a veto threat if it does manage to pass Congress—but it's a symbol of the growing frustration on Capitol Hill over the impact of tariffs on the economy and the markets. Republican frustration may increase over the next two weeks. Lawmakers are scheduled to be back in their districts for the Easter recess, where they may get an earful from frustrated voters and company executives.
The Senate passed a modified budget plan and sent it back to the House of Representatives. Tariffs were not the only big policy news coming out of Washington. On April 5th, the Senate approved a modified budget resolution, which outlines the target amount of tax cuts and spending cuts in the upcoming budget bill. The House passed its version last month. That plan calls for $4.5 trillion in tax cuts, at least $1.5 trillion in spending cuts, and a $4 trillion increase in the debt ceiling. The Senate version calls for $1.5 trillion in tax cuts, a minimum of $4 billion in spending cuts and $5 trillion debt ceiling increase.
A key factor is that the Senate plan assumes that all the expiring 2017 tax cuts will be extended without any budget impact—a gimmick that makes those tax cuts look like they won't increase the deficit. The House has not yet embraced the controversial maneuver. In addition, the Senate bill has an extremely small target for spending cuts, but that is designed to just move the process forward. Senate leaders are assuring skeptical House members that they will be committed to larger spending cuts later in the process. The House will try to approve the Senate version this week, though it's not clear yet that they have the votes to do so. Both chambers have to pass the same plan in order to unlock the next step, where lawmakers will have to agree to every specific tax cut and spending cut in the massive bill.
A House committee passed a stablecoin bill. The House Financial Services Committee last week approved landmark legislation that would create a regulatory structure for stablecoins for the first time. Six Democrats crossed party lines to support the bill, which is expected to be considered by the full House later this spring. The bill establishes a federal framework for stablecoins, which are cryptocurrencies pegged to the U.S. dollar and used for payments. It charges the Office of the Comptroller of the Currency (OCC) with regulating nonbank issuers of the coins and requires full backing of stablecoins with cash-equivalent assets such as Treasuries. Monthly attestations of these reserves must be verified by public accounting firms.
Cryptocurrency legislation is a top priority for Republicans in Congress. A second bill creating a regulatory framework for other digital assets is expected to move forward later this year.
House Republicans welcomed two new members. As expected, Republican candidates won both special elections held last week in Florida. Rep. Jimmy Patronis, the former Florida chief financial officer, was elected to fill the vacancy created when former Rep. Matt Gaetz resigned late last year. And former state senator Randy Fine won a race to replace former Rep. Michael Waltz, who resigned in January to become Trump's national security advisor. Both took the oath of office on April 2nd. The victories give the Republicans a bit of breathing room by expanding their margin in the House to 220-213, with two vacancies. Those vacancies, both Democrat-leaning, will not be filled by special elections until this fall, so the current margin should stick for several months.
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