There is no way to overstate just how stunning the Republican sweep was across the electoral map last night. The GOP won every single closely contested Senate race but one, taking Democratic seats in Iowa, Colorado, North Carolina, and Arkansas, as well as probably Alaska and Louisiana in a December 7 run-off, while they beat back Democratic upset bids in Kentucky, Kansas and Georgia. Even Virginia, considered an easy Democratic re-election, was so close it will go to a recount, and the Democrats barely clung on to their seat in New Hampshire. In the House, the GOP picked up even more seats for a 246-189 majority, the largest GOP House majority since the 1920s, while unexpectedly winning a slew of gubernatorial races as well.
A sea of missives have already crossed market screens today, so we will limit our comment to two points.
*** First, we think more than ever the next two years will see much more in the way of deal-making and bi-partisan legislation, especially on the debt ceiling and the budget. The key is the motives and political imperatives of the leadership on both sides on Capitol Hill – and even from the AWOL President – to get legislation passed with an emphasis on growth, and the more mainstream, non-ideologically-driven Republicans who scored the big wins last night in sharp contrast to the 2010 mid-terms that were dominated by a flash flood tide of then-new Tea Party. So while no doubt there will still be headlines of partisan positioning and confrontation, we continue to think the pundit patter presuming more of the same polarized gridlock of the last two years can be safely ignored. ***
*** Second, we also think the talk of a Republican-led assault on the policies and independence of the Federal Reserve can be likewise ignored. The “Rules-based” and “Audit the Fed” crowd on the GOP far-right will press ahead with headline-grabbing hearings, but proposed legislation is unlikely to ever clear floor votes. The Fed is in fact low on the agenda of the Senate and House GOP leadership. Assuming a rates lift-off next year towards policy normalization and the recovery stays on course, the Republican establishment, as much as anyone, wants and needs a stronger economy going into 2016 if they are to have any hope of taking the White House. Nominations to the Federal Reserve Board of Governors, however, will need at minimum to be paired with a Republican-endorsed nominee. ***
Henry Clay as a Senate Role Model
It is no surprise that the new Senate Majority Leader Mitch McConnell’s apparent role model is his fellow Kentuckian Henry Clay, the “Great Compromiser” of the 19th century who dominated the ante-bellum Congress. In an unusually gracious victory speech last night, McConnell promised a return to the Senate style of old, allowing debate and votes on amendments and bills on the Senate floor. McConnell can be “inside the Beltway” nerdy in the best of times and isn’t especially adroit with spin, so his comments are best taken at their face value.
And McConnell has a knack for deal-making craftsmanship of his own: think back to the rather clever “McConnell mechanism” structured to allow reluctant Republicans to pass a bill increasing the debt ceiling by voting no.
And while the scars are still too fresh, we also still suspect Democratic Senate Leader Harry Reid will soon either step down or will be ousted in a leadership challenge. Despite his vow this morning to remain as Democratic Minority Leader, it is almost inconceivable he could retain his position after the disastrous election defeats last night – much of which in coming days will be justifiably put on his “goalie” strategy of blocking debate on the Senate floor these last two years that we wrote about previously (see SGH 9/3/14,”US: The Significance of a Narrow GOP Majority”).
For our money – again it is too early to press this with a high degree of conviction – we put the chances of New York Senator Chuck Schumer seeking the job of the new Senate Minority Leader as “up to him” to challenge Reid now, or to wait until 2017. Schumer, however liberal he may be, is a deal-maker who can work with Republicans and they with him. He can be effective with or without the title.
Likewise in the House, not only did the Republicans net 13 new seats for a 246-189 majority, but those gains were picked up by non-Tea Party candidates over Tea Party supported candidates seats by an estimated four-to-one ratio. This reduces the Tea Party percentage of the GOP House majority, and will in turn enable Speaker Boehner and the House Republican leadership to circumvent most of any antics from the Tea Party faction, especially on “must pass” legislation.
In the weeks ahead, Speaker Boehner will be working with Senate Majority Leader McConnell to coordinate a target list of the most pressing legislation they will want House and Senate Committee Chairs to move in the first quarter of 2015.
There will undoubtedly be an ideological edge to some party-defining bills sent to the President, but we also think the new political dynamic on the Hill and the imperative of the 2016 elections map and voter expectations will free up centrist deal-makers on both sides of the center aisle to cut deals and pass bi-partisan legislation.
If, for instance, Virginia Democrat Mark Warner survives a recount for his seat, he can be expected to become active in promoting bi-partisan-flavored bills since he would have nearly lost because he had no record to speak of under Majority Leader Reid’s strategy of shutting down debate and amendments in the Senate.
At the top of the list is higher defense spending and a further easing of the fiscal constraints of the sequester; passage of a bill to increase the debt ceiling; a fairly quick passage of the Keystone XL pipeline (and possibly further gains in the US energy sector); fast-track negotiating authority for trade deals; and some serious, but far-short-of-repeal “fixes” to the Affordable Care Act such as repealing the medical device tax.
The Fed and the GOP
Another takeaway from the election results, we think, is the low likelihood that the new Republican-majority on Capitol Hill will put pressure on the Federal Reserve, either to alter its current policy path, adopt new “rules-based” policy, or for Congressional oversight through “audits.”
It is our sense the Fed’s independence is secure but only because the most powerful people in both parties will defend it in public and limit any “cajoling” to private meetings. Expect frequent outbreaks of headline risks, however, with hearings and bill introductions, possibly even markups of anti-Fed legislation. But ultimately, all legislation threatening the Fed will fail.
The Federal Reserve, of course, has been a target of populists since its creation in 1913. The “Cross of Gold” is the speech every populist, Democrat or Republican these days, yearns to deliver. But while there are reasons to be attentive to the threats to the Fed from what’s left of the Tea Party, it is best kept in perspective that attacking the Fed is not something most Republicans will put on their to-do list in the 114th Congress.
Most of the populists on the Democratic side are disinterested in monkeying around with the structure of the Federal Reserve, or in monetary policy at all. Banking Committee member Sherrod Brown (D-OH) is an exception; but it is Elizabeth Warren who leads the left’s populist crowd and she would rather use the Fed, not reduce it.
Jeb Hensarling, the returning chairman of the House Financial Services Committee, is likely to hold still more hearings on whether the Fed should be required to follow a vaguely defined “rules-based” monetary policy, for instance, but our sense is that he has limited Republican conference support and no support at all from the House Republican leadership. Again, there is likely to be headline risk, but extremely low odds of legislation ever reaching the House floor, much less passing the Senate or going to the President to veto.
Much of the reason for Hensarling’s limited reach on the Fed is the stature and intentions of his Senate counterpart, Banking Committee Chairman Richard Shelby. Shelby is not a typical Southern conservative, and in fact has repeatedly shown a centrist streak on key issues to do with economic and regulatory power.
For one, he supports financial regulation, though he opposes the Consumer Financial Protection Bureau, but because he believes its existence weakens the functional regulators and he, even more unusually, is pro-plaintiff lawyer because he contends that private-sector litigation is a more consistently effective police force at exposing and punishing financial criminals than government lawyers.
If Shelby does toy with legislation on the Fed policy, he is more likely than not to be angling for leverage on something else, most logically, the Fed’s regulatory oversight.
Our sense is that Shelby, while certain to give Fed Chair Janet Yellen a rough ride at times in testimony, will not upend Yellen and the Fed’s policy decisions in the way audit or rules based bills might. Make no mistake, Shelby’s challenges to Yellen’s numerous decisions on monetary policy and regulatory authority will be serious and, at times, punishingly so.
But — as long as he continues to see Yellen as an honest, politically neutral, public servant — he will not drive her nor the Fed over the cliff. It would weaken the Fed if he did, which he sees as his potential ally on the regulatory front and, besides, it would be ungentlemanly.