House Republicans pass reconciliation bill... The legislation includes $3.8 trillion in tax cuts and cuts in growth of Medicaid and SNAP coupled with the phase out of some clean energy tax credits from the Inflation Reduction Act, and increases for reference prices in Title I of the farm bill.
Some key provisions:
- Nearly $1 trillion in cuts from the growth in Medicaid and food stamps
- Work requirements for Medicaid starting at the end of 2026
- Boosts farm bill Title I safety net reference prices
- Positive changes to crop insurance
- Raising the debt ceiling by $4 trillion
- Spending $150 billion on defense programs
- Limiting judges’ power to hold the Trump administration in contempt
- Phasing out some Biden-era energy tax credits sooner than planned
- Increasing the state and local tax deduction
- Making trillions of dollars of income tax breaks permanent
- Allocating $45 billion to build new immigration detention facilities
- Allowing certain taxpayers to deduct income from tips on tax returns
Of note: The changes included phasing out some renewable energy provisions from the Inflation Reduction Act (IRA) sooner than the original bill had scheduled. There were no changes, however, to the Clean Fuel Production Credit (45Z) in the final package.
Leading Democrats of the House Ag Committee slammed the $300 billion in food assistance cuts included in the Republicans’ budget reconciliation bill after it was voted out of the House along party lines. “The Republicans’ budget will make America hungrier, poorer and sicker. Parents struggling to afford groceries for their families and seniors living on fixed incomes will have their food taken away if this bill becomes law,” said Ranking Member Angie Craig (D-Minn.). “At a time when grocery prices are going up and retirement accounts are going down, we must protect the basic needs programs that help people afford food and health care. As a mother and someone who needed food assistance at periods in my own childhood, I condemn this attempt to snatch food off our children’s plates to fund tax breaks for large corporations. I call on my Senate colleagues to stop this attack on working Americans that takes food away from families and threatens a full, five-year bipartisan farm bill.”
The bill will head to the Senate, where significant revisions — especially to tax provisions — are expected. Senate Republicans are signaling plans to overhaul key sections, even as a potential debt ceiling crisis looms in August. If altered, the House would need to pass the revised version with its razor-thin three-seat GOP majority — and against a louder Democratic campaign.
Bond market worries... Risk appetite in the general marketplace so far this week is still not robust after Moody’s Investor Services last Friday downgraded the United States’ long-term credit rating from Aaa to Aa1, citing sustained increases in federal debt and chronic fiscal deficits. The move by Moody’s followed previous similar moves by Fitch and S&P Global ratings agencies.
While Moody’s debt downgrade of U.S. government debt was not a shocker, it was a stark reminder to the general marketplace that the U.S. has a problematic debt burden. All it would take is a change in global investor perceptions on what amount of U.S. government debt is untenable to start the financial market dominos falling.
Bond traders, the so-called smartest guys in the room, will be the arbiters on how much U.S. government debt is acceptable, or not acceptable. At present, bond traders are not indicating real serious problems with the current U.S. debt load. However, bond traders are implying important financial/economic matters that need addressed. These matters include: a global trade war that may have already damaged global economic growth despite recent positive developments on world trade, including the U.S. and China (the world’s two largest economies) discussing reducing tariffs. Problematic price inflation could be around the corner due to reduced global commerce the past several weeks, prompting product shortages on retailers’ shelves—suggesting higher prices.
Federal Reserve officials watch the U.S. Treasury markets very closely. Treasury traders are presently signaling to the Federal Reserve “not yet” on any U.S. interest rate cuts. The U.S. economy is expanding just enough to keep the Fed standing pat on interest rate cuts—especially with the worrisome element of potentially increasing inflation in the coming few months. Fed officials are going to heed what the bond markets are indicating, despite pressure from President Trump on Fed Chair Jerome Powell to lower interest rates.
The Moody’s U.S. debt downgrade is near-term bullish for safe-haven gold and silver markets. It’s bearish for the U.S. dollar index and bullish for other major currencies like the euro. The renewed focus on U.S. fiscal and debt problems this week has pressured the U.S. stock indexes. And the resulting somewhat elevated risk aversion in the marketplace this week, albeit not real keen, has been negative for the grain and livestock futures markets.
However, it’s likely the Moody’s news will wear off quickly and marketplace attention will then be more on inflation worries and the Fed likely standing pat on U.S. interest rates for at least the next few months. The scenario of a less dovish Federal Reserve is a bearish element for gold, silver and other commodity markets, suggesting less consumer and commercial demand due to higher borrowing costs. It’s also bearish for stock indexes and bond futures prices (rising yields). This scenario should be U.S. dollar-supportive due to U.S. interest rates not coming down. Globally, less dovish central banks may mean less consumer demand across the globe. Don’t be surprised to see the dreaded word “stagflation” pop up more in the marketplace discussion this summer. Stagflation means lower economic growth and rising inflation, which is bearish for most markets.