Subject: Update -- Shelby's Plans for 2016
From: Dana <[email-masked]>
To: Mike Pyle <[email-masked]>
Cc: Mike Schmidt <[email-masked]>
Date: Fri, 18 Mar 2016 20:17:34 -0400

Mike & Co. --
Now that Senate Banking Chair Richard Shelby has beaten back his primary challenge, there are signs of life on the Committee.   The first nominations to get votes in over a year have cleared and there is talk once again of a Shelby 2.0 financial regulatory package. 

Meanwhile, the House has been active, passing three House Financial Services bills.   Whether these and the ones expected to follow will become this year's low-hanging fruit, ripe for must-pass legislation as occurred with the Highway bill last year, is explored below.  

Good weekends all,

Dana

____________________________________

Shelby’s Plan

Speaking at the ABA Summit Wednesday, the Senate Banking Chair called on Democrats and Republicans to come to the table to discuss alleviating small and community banks from burdensome regulations.  Shelby’s Financial Regulatory Reform Act of 2015 has been a dud so far, and much of the blame for that was laid at the feet of Democrats and the administration who “simply said ‘no’ to any changes” to DFA. 

Missing from his speech was any mention that the Banking Committee was effectively shut down throughout Shelby’s primary campaign, and only just began to address its regular business last week.

Whether Shelby can build enough support to pass the bill remains to be seen – but given its anemic life so far, that doesn’t seem entirely likely.  The Senator did not make mention of alternatives for passage, nor did he list specific changes which may make the reform package more palatable to Democrats.

Bipartisan Grouping?

Sen. Donnelly, a moderate Democrat on the Committee, spoke Wednesday at the Chamber of Commerce.  He mentioned that the bipartisan group of Senators who worked with Shelby last year on his reform package (including Warner, Heitkampf, Tester, Crapo, Moran, Corker) would “get our group back together again.”

It’s easy to think Sens. Shelby and Donnelly’s comments point toward upcoming negotiations on the issue.  The Banking Committee has been all but moribund over the past months, building up a significant backlog of nominees who need consideration, and the already truncated calendar will work against efforts to reach consensus on divisive or comprehensive issues.

Should Donnelly’s bargaining group fail to materialize, Shelby may proceed with attaching pieces of his legislation to must-pass bills at the end of the year, or use appropriations or other vehicles to force through his reforms.  In fact, Shelby has some recent experience in doing just that.  While speaking on Shelby’s bill, Donnely said that the group made progress on “20 or so different parts of it, most of it aimed at the community bank level,” and some of those parts did in fact end up attached to last year’s Highway bill.

So far, this year looks like it could be a repetition of 2015.  The Shelby bill is being brought up again, but it is unclear if there will be extensive discussions on it or not. 

Baskets of Fruit

There are three disparate categories of proposals being discussed by lawmakers, two of them varying heights of low-hanging fruit and the third something very different.

All of the proposals that Donnely discussed at the Chamber of Commerce were in the first – these were small, easy, and inoffensive reforms that could gain broad support.  These proposals were attached to the Highway Bill and make up last year’s low hanging fruit.

Here is this year’s low hanging fruit: the House Financial Services committee recently held a series of hearings on the bills below, all of which have passed through the House at large

•   H.R.2209 —

To require the appropriate Federal banking agencies to treat certain municipal obligations as level 2A liquid assets, and for other purposes.

This bill would require the appropriate Federal banking agencies to treat certain municipal obligations as level 2A liquid assets, which would allow them to count as up to 40% of HQLA

•    H.R.766 — 

Financial Institution Customer Protection Act of 2016

Prohibits a federal banking agency from formally or informally suggesting, requesting, or ordering a depository institution to terminate either a specific customer account, or group of customer accounts, or otherwise restrict or discourage it from entering into or maintaining a banking relationship with a specific customer or group of customers, unless: (1) the agency has a material reason to do so, and (2) the reason is not based solely on reputation risk.

•     H.R.1675 — 

Capital Markets Improvement Act of 2016

Directs the Securities and Exchange Commission to revise regulations to require an issuer to furnish investors with additional specified disclosures regarding compensatory benefit plans if the aggregate sales price or amount of securities sold during any consecutive 12-month period exceeds $10 million (currently $5 million), indexed for inflation every five years.

The third category would be calls to repeal, “fixing,” or otherwise instituting broad-based reform of DFA measures.  These are complete non-starters and would not receive Democratic votes, especially in an election year.  These proposals make good news stories, which is probably why Jeb Hensarling’s speech this week got more attention than Shelby’s, despite the latter being more actionable than the former.

_________________________________

Future/Recent Updates

•   Thursday --  Fed Update
•   Friday --  Shelby's 2016 Plans
•   Monday --  ERI/Housing
•   Tuesday --  Budget Status
•   Wednesday --  The Fiduciary Rule

  •   ERI/Housing
  •   EU/US Derivatives Deal
  •   Pension Crisis

He's Back:  Shelby's 2016 Plans  (Mar. 19)
Fed: Pause and Recalibration  (Mar. 17)
Regular Budget Order or None  (Mar. 14)
Tax Bills on the Hill (Mar. 11)
Senate Banking Nominations (Mar. 10)
Survey of the SIFI Landscape  (Mar. 9)
Michigan and the my of Flint  (Mar. 8) Puerto Rico's Debt Crisis  (Mar. 5)
Municipal Finance Caucus  (Mar. 4) 
Flint Bill:  Provisions & Prospects (Mar. 2) 
Top Tax Bills Handicapped  (Feb. 24)
Bigger than the Budget Battle  (Feb. 23)
Infrastructure Finance Update  (Feb. 18) 
Does DFA Fail on Too Big to Fail? (Feb. 17)
Below the Radar/Customs Bill  (Feb. 16) 
International Tax Status  (Feb. 11)
The Fed Holds Steady  (Feb. 10)
Obama's FY17 Budget  (Feb. 9) 
Tax Talk of the Town  (Feb. 3)
Defending Dodd-Frank  (Feb.2)

___________________ 

Mike & Co. --
If voters are uncertain and uneasy about the state of and short-term prospects for the economy, they are in good company. Surveying the indicators, the Federal Reserve voted yesterday to recalibrate before resuming its planned rate increases.   Its announcement reduced from four to two the number of such increases it expects this year. 

On balance, that is probably good news.  The Fed's rate hike in December -- the first since the financial crisis hit -- and global economic conditions punished markets at the beginning of the year.  Investors and cash remain on the sidelines, or overseas, to an extent that applies brakes to the underperforming economy.   The Fed did not want to add another bump in the road.  

Below is a drill-down on the specific factors and data points that led to the Fed's decision and what it portends. 

Best,

Dana

_____________________________________

The Fed -- a Pause and Recalibration

The Federal Reserve’s March FOMC meeting is over and nobody is surprised at their announcement that rates will stay steady.  While further improvement in labor market conditions and the jump in core inflation means that the domestic economic data could have given the Fed all the excuse it needs to raise rates today, global concerns and an overall shaky stock market allowed the doves to win the day. 

Economic Indicators and Forecast

The indicators listed in today’s announcement:

•   Inflation (CPI), the primary indicator the Fed looks to in making policy, is slowly climbing, up 1.25 percent in the twelve months ending January 2016, or 1.7 percent annually.   Core inflation (CPI less food and energy) hit 2.3% in February.

•  Unemployment has held at 4.9 percent through the first two months of the year -- this factor, historically close behind inflation in significance to the Fed, is moving slowly into healthy if not robust territory

Those indicators led the Fed to revise its economic projections to the key measures below:

 -- median growth projection down from 2.2 to 2 percent in 2018

--  median unemployment projection shifts from 4.7 to 4.5 percent by the end of 2018

--  median inflation projection rises from 1.2 to 1.9 percent in 2017 and 2 percent in 2018

Statement Content and Meaning

The announcement is important in that it sets the monetary policy roadmap for the remainder of 2016, or at least that’s what observers will think.  The Fed’s dual mandate is to maximize employment while stabilizing prices – this has lead the FOMC to aim for 2 percent long-term inflation and unemployment around 4.8 percent.  

The Fed’s decision indicates that it believes there is still enough slack in the U.S. economy to allow for a gentle glide path toward long-term rates.  This slack gives the group some cover to consider the global impact of their decisions – experts have warned that the emerging markets overfed on easy credit while interest rates were kept low, leading to a potential credit crisis abroad should interest rates spike.

Markets, both domestic and international, are continuing to react to the Fed’s announcement.  U.S. Treasury bonds slipped after the announcement, and the dollar weakened as commodities prices rose.  The Dow Jones and S&P 500 both saw a small rally to finish the day up 0.4% and 0.6% respectively.  Asian markets, which were perhaps the most worried of a rate hike, were buoyed upward by the Fed news.  

Small Differences Magnified

Market turmoil has concerned dovish policymakers such as Governor Lael Brainard who warned last week that her colleagues “should not take the strength in the U.S. labor market and consumption for granted.”  Meanwhile, Fed Vice Chair Stanley Fischer has said, “we may well at present be seeing the first stirrings of an increase in the inflation rate.”  Chairwoman Yellen lies somewhere in the middle, and though she’s normally classified as a dove has been said to sympathize with the arguments of her more hawkish Governors as of late.

What lies between these two groups is the issue of how to weight different indicators in their economic models.  Doves are more likely to see global spillover from the Fed’s monetary policy as a limiting factor, as international demand drops and credit tightening abroad effects the US domestic economy.  Hawks are more likely to see the recent uptick in core-PCE inflation values as cause for concern.  

The differences between these groups aren’t significant in the grand scheme of things, but they’re often played up in the media to represent a tug of war over the ear of the Chairwoman.  In reality the policymakers share opinions more often than not.  Today’s decision had only one dissenter.

Futures markets' odds of the next rate hike occurring in June fell from 66 to 38 percent yesterday afternoon.  That is the sound of the markets breathing a sigh of relief.  The Dow finished the day at its highest close of the year. 
_____________________________________

Future/Recent Updates

•   Thursday --  Fed Update
•   Friday -- Pre-Recess Review
•   Monday --  ERI/Housing
•   Tuesday --  Budget Status
•   Wednesday --  The Fiduciary Rule

  •   ERI/Housing
  •   EU/US Derivatives Deal
  •   Pension Crisis

Fed: Pause and Recalibration  (Mar. 17)
Regular Budget Order or None  (Mar. 14)
Tax Bills on the Hill (Mar. 11)
Senate Banking Nominations (Mar. 10)
Survey of the SIFI Landscape  (Mar. 9)
Michigan and the my of Flint  (Mar. 8) Puerto Rico's Debt Crisis  (Mar. 5)
Municipal Finance Caucus  (Mar. 4) 
Flint Bill:  Provisions & Prospects (Mar. 2) 
Top Tax Bills Handicapped  (Feb. 24)
Bigger than the Budget Battle  (Feb. 23)
Infrastructure Finance Update  (Feb. 18) 
Does DFA Fail on Too Big to Fail? (Feb. 17)
Below the Radar/Customs Bill  (Feb. 16) 
International Tax Status  (Feb. 11)
The Fed Holds Steady  (Feb. 10)
Obama's FY17 Budget  (Feb. 9) 
Tax Talk of the Town  (Feb. 3)
Defending Dodd-Frank  (Feb.2)

___________________