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The Senate confirmed three of President Trump’s nominees, including Linda McMahon to serve as Education Secretary (see below), Todd Blanche to service as Deputy Attorney General and Troy Edgar to serve as Deputy Secretary of Homeland Security. It also passed two resolutions to overturn a Biden administration Internal Revenue Service (IRS) rule on digital asset sale reporting requirements and a Consumer Financial Protection Bureau rule on digital consumer payment platforms. The House passed three resolutions repealing Biden administration energy and environmental rules on appliances, tires and offshore drilling. It also voted to censure Congressman Al Green (D-TX) for disrupting President Trump’s Joint Address to Congress.

The Senate will continue to confirm Trump administration nominees and a bill to permanently classify fentanyl-related substances as Schedule I controlled drugs. The House will vote on the Senate-passed IRS measure and on a bill to allow more time to combat pandemic-era unemployment insurance fraud.

Trump Address to Congress Takeaways.

We sent a summary out on Wednesday evening, but it was not approved for external distribution at that time. The piece is now approved for external circulation and can be found here.

Tariff Turbulence.

While financial markets reacted poorly to specific tariff increases applied this week to Mexico, Canada and China (the US’s three largest trade partners), President Trump made the case for tariff increases in his speech to Congress this week. He reminded us that this could be just the beginning of the tariff story. President Trump could apply a much broader wave of global tariff increases beginning on April 2. He has cited this date as the start for “reciprocity” on tariff levels, whereby the US will apply the same tariff levels to which that other countries subject US goods. This would result in higher tariff rates on a wide range of goods entering the US, but it will also likely result in some countries lowering tariff rates to accommodate the US and not endanger current trade flows. This week’s tariff developments were important, but the reciprocity policy beginning April 2 likely will have more of an impact on global trade and tariff rates, for better or worse.

Tariffs, Take Two.

President Trump just yesterday paused higher tariffs on imported automobiles from Mexico and Canada for one month. The delay was prompted by concerns from the automobile industry. This is good news for that sector, but the broader array of tariffs on Mexico, Canada and China remain intact. The President could pause higher tariffs on other products as negotiations occur behind the scenes. This is a big problem with the higher tariff action. Higher tariffs are regularly threatened and then either enacted or not. If enacted, they may stop and re-start. No one really knows what their duration will be. We’re not the experts on how the markets will respond to all of this activity, but we have a high level of confidence that higher tariff levels will continue to be threatened, imposed, withdrawn, revised and subject to daily negotiations every day. They will always be accompanied by a high sense of unpredictability, which the markets will generally loathe or have to adjust to as the ongoing norm under Trump (as they did in his first term).

March 14 Deadline.

We opined three weeks ago that chances were more likely than not of a short government shutdown after March 14, when current funding is scheduled to expire. We are one week away from the deadline, and we still think there is a good chance of a short shutdown. After partisan bickering over the next week about whether the Executive Branch is legally required to spend funds appropriated by Congress (including much of the money DOGE has identified as “savings”), both the House and Senate likely will pass a bipartisan measure to extend the deadline into late April or May. President Trump would like to see an extension of the debt ceiling added to that bill, but we don’t think he will be successful. As a reminder, the funding bill addresses fiscal year 2025, which began over five months ago, and funding for October onwards will be an entirely separate fight.

Balancing the Budget.

President Trump said in his speech that balancing the federal budget is a top priority of his. This surprised us because the President had never shown any real passion for balancing the budget in the past. In fact, no leader from either party in recent memory has expressed strong support for this goal. The President cited the DOGE’s efforts to identify billions of dollars in spending, but it’s not clear now whether those funds will be available for the President to use to offset the budget deficit of nearly $2 trillion. Further, saving billions of dollars is a good start but a drop in the bucket compared to the size of the deficit. As DOGE’s work evolves, there may be other savings identified that could also be used to offset the budget deficit. Still, we think there will be tremendous headwinds for the President to achieve a balanced budget in the next four years. The bipartisan appetite to reform Social Security, Medicare and Medicaid, cut broader government spending or raise taxes – all likely more necessary ingredients for a balanced budget in any bipartisan agreement – is too weak to make a meaningful impact on the annual deficit.

More Spending.

Despite the President’s call for a balanced budget and the reforms he is seeking to make at many agencies (including workforce reductions), he is still calling for significant spending increases in some areas. This week, he pressed lawmakers to add funds to the government funding bill for targeted areas, including defense, veterans health care, immigration enforcement and air traffic control. A House hearing this week underscored the crisis in the shortage of air traffic controllers. The President has asked for an additional $858 million to hire and train new controllers and upgrade related technology and security. New Transportation Secretary Sean Duffy would like to increase controllers’ starting salaries by 30 percent and has pledged to accelerate the hiring process. The takeaway here is the difficulty of reducing federal spending in Washington. Leaders from both parties may find it easy to reduce certain spending, but it is never the same spending. Funding, therefore, continues for most or all programs as a bipartisan compromise, and the deficit continues to rise. Lawmakers find that raising federal spending levels is easier than reducing the budget deficit, and Congress generally follows the easier path.

CHIPS Act in Focus.

While President Trump has previously expressed his opposition to the CHIPS Act, we were a little surprised that he called for its repeal in his address to Congress this week given the bipartisan nature of the bill. As a reminder, the CHIPS Act passed in 2022 and authorized over $50 billion to boost domestic manufacturing of chips and support related US research and development. This bill was important to many lawmakers as a means to counter the US reliance on China and others for semiconductors that are critical to the future of our society and economy. Many Senate Republicans joined in the chorus of lawmakers opposed to gutting the law. Will this law now be repealed? No, but it could be subject to some modest reforms going forward. The US government will continue to invest in domestic semiconductor production and play catch up with many other countries, both friends and foes.

Tax Cut for Seniors?

While on the campaign trail, President Trump pledged to eliminate the tax seniors pay on their Social Security benefits. Republican lawmakers are interested in making good on this promise, but such a measure would have a tough time attracting the 60 votes in the Senate necessary for its passage. Republican lawmakers have been looking at alternatives to help cut taxes for seniors. The leading idea right now is to increase the standard deduction for seniors. As a reminder, the 2017 tax law doubled the standard deduction ($15,000 for single filers and $30,000 for married couples for 2025). Renewal of this policy will be a priority in this year’s tax bill. The idea is to increase the standard deduction above and beyond this level for seniors as a means to be equivalent to not paying taxes on Social Security benefits. We are keeping an eye on this as Republicans would like to make good on Trump‘s promise to lower taxes for seniors, but it may run into resistance since it would increase the debt and deficit.

Education Department Downsize.

As a part of the Trump administration’s efforts to overhaul and reduce certain federal agencies, the Education Department is on the radar for major reform, including a proposed closure. Closure of the department would require an act of Congress, and such legislation would not be able to pass this year. Instead, there will be budget cuts, elimination of certain programs, a scaling back of federal oversight of education generally and a shift of responsibility for education funding to the states. Currently, state and local governments provide the majority of public-school funding (85%-90%). The Senate this week confirmed Linda McMahon to serve as the Education Secretary, and while she has advocated for the department’s closure, don’t expect it to happen.

Democratic Rebuttal.

If you went to bed before new Senator Elissa Slotkin (D-MI) delivered the Democratic rebuttal to President Trump's address to Congress, we don't blame you. Starting after 11 pm ET, Slotkin's address was very different than Trump's. It emphasized her bipartisan credentials as someone who just won a Senate race in a purple state that Trump won. She focused on her work under both Presidents Bush and Obama and offered a path forward for Democrats. Nothing in the speech was groundbreaking, nor is it likely to gain a lot of attention, but it did try to associate Democrats with a greater degree of normalcy in a purple state that is very important. Normalcy is one ingredient Democrats need to be associated with as they mount their political comeback. They relied on this in 2018 when they took a majority in the House after Trump’s first two years in office (and when Slotkin was first elected to the House), and Joe Biden used it to win in 2020. The fact that Democrats chose to emphasize a moderate Democrat from a swing state instead of a presidential hopeful appealing to the base is the first clear sign of where their heads are following defeat in 2024.