Washington: What to Watch Now

The Federal Reserve is in the spotlight this week. The Federal Open Market Committee (FOMC) gathers September 15 in Washington for its two-day monetary policy meeting. Markets are anticipating the first interest rate hike since 2023. Fed futures on September 14 were implying a nearly 93% chance of a hike, according to the CME's FedWatch tool. Fed Chair Kevin Warsh's comments in late August at the Fed's annual symposium in Jackson Hole, Wyo., indicated that the Fed's primary focus right now is getting inflation under control. The combination of last week's sticky inflation report and the previous week's robust job numbers seem to be setting the stage for a hike.

Markets will be keen to see if Warsh sheds any light on whether the Fed is thinking about multiple rate hikes before the end of the year. Warsh has made it plain that he does not like forward guidance and has been loath to provide it. This week's meeting does include release of the Summary of Economic Projections, better known as the "dot plot," which offers a general indication of how Fed members are thinking about future rate increases. Warsh opted out of providing his projections at the June meeting, but he has not prevented others from sharing their outlook.

The president made the proposal during his keynote speech last week at the Republicans' two-day midterm convention in Dallas. The announcement appeared to catch most Republicans off-guard. Trump said the checks would be distributed to every American adult "if Republicans win the midterms." But he cannot do this unilaterally or by executive order; Congress would have to pass legislation funding the payments. Reaction on Capitol Hill has been muted at best.

Concerns immediately rose over the price tag for the proposal. With roughly 270 million Americans age 18 and over, according to the U.S. Census Bureau, the checks would cost the government more than $1.3 trillion. That would increase the budget deficit and the national debt, which already topped $40 trillion for the first time last month. There are also concerns that payments could cause a spike in inflation. Many economists say that the three COVID-19-era stimulus payments, which together totaled a maximum of $3,200 for each eligible adult, were a major contributor to the post-COVID increase in inflation. Bottom line: It seems highly unlikely that Congress would vote for this.

Both chambers returned to Washington on September 14, but the stay will be brief for House lawmakers. House Republican leaders earlier this month canceled the planned sessions for the weeks of September 21 and 28, meaning the House will only be in town through September 17 before taking an eight-week break until after the November elections.

The Senate is scheduled to be in D.C. through the end of September, but there is an increasing chance that they, too, will cut short their session and hit the campaign trail. Lawmakers have already addressed the most notable pre-election deadline, passing a bill earlier this month to fund government operations from October 1 through December 11, ensuring there won't be a government shutdown before the election.

The Senate is scheduled to take an initial procedural vote on the latest version of the CLARITY Act, legislation that would create a regulatory framework for the cryptocurrency industry. The issue has percolated for more than a year on Capitol Hill as both parties seek to put some structure around the growing cryptocurrency industry, including dividing oversight responsibility between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).

Republicans unveiled a new version of the bill on September 13, which attempts to address two key concerns from Democrats. It gives state attorneys general power to enforce rules on federal officials who have significant financial interest in cryptocurrency or related products. Democrats have been concerned about the lack of ethics provisions, given the president's family ties to crypto interests.

The bill also attempts to address a long-standing divide between traditional banks and crypto companies over the payment of "rewards" on stablecoin holdings. Banks, especially smaller community banks, are worried that crypto companies will be able to pay higher yields, leading to a significant reduction in bank deposits. The newest version of the bill directs the Treasury Secretary to "monitor" deposit flight, but eight major banking associations issued a statement on September 14 opposing the bill and saying that the provision did not go far enough.

The vote will need a 60-vote supermajority to move forward, and it's unclear whether enough Democrats would support the vote to reach that threshold. Even if it passes, it would require a week or more of debate, amendments, and additional votes. Given the proximity to the election, the bill's prospects of passing the Senate this month remain iffy at best.

On the latest episode of the WashingtonWise podcast, Joe Mazzola, Schwab's head trading and derivatives strategist, joins me for a great conversation about the competing signals coming from the market today. Joe shares his thoughts on how the unusually strong earnings backdrop—with revenue, profit, and margin growth rising together—has powered this year's rally, and why a higher bar for future results could make those gains harder to repeat. He also unpacks how turmoil in the bond market is impacting equities and how the market is thinking about a possible Fed rate hike. Plus, he shares practical approaches investors can consider to manage short-term volatility heading into the election.