Freedom Caucus Issues an Ultimatum

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Here’s what else we’re watching.

Freedom Caucus Issues Demands in Debt Limit Fight

Members of the far-right House Freedom Caucus on Friday demanded steep spending cuts and a rollback of major portions of President Joe Biden’s agenda and insisted that their conditions be met before they will consider voting to raise the debt limit.

At a press conference at the U.S. Capitol, Freedom Caucus leaders said that they want to shrink Washington, D.C., and grow America. They railed against the federal government and what they called a "wasteful, woke and weaponized federal bureaucracy" and dismissed the $6.9 trillion budget plan released Thursday by President Joe Biden. Instead, the group, led by Rep. Scott Perry (R-PA), called for setting federal spending at 2022 levels for a decade and reversing legislation enacted by Democrats.

"We can save over $3 trillion over the next decade by putting that spending for the federal bureaucracy back to pre-Covid levels," said Rep. Chip Roy (R-TX). "Now I ask you, who among us thinks that the size of government in 2019 was really small and efficient and effective?"

The Freedom Caucus demands include:

* Capping discretionary spending at fiscal year 2022 levels, meaning that spending would be cut by $131 billion for fiscal year 2024, and then keeping that cap in place and allowing just 1% annual growth for the rest of the 10-year budget window;

* Ending President Joe Biden’s $400 billion student debt cancellation plan, which is being reviewed by the Supreme Court;

* Rescinding all unobligated, unspent Covid-19 funding;

* "Recouping" the $80 billion in additional Internal Revenue Service funding over 10 years and hundreds of billions in climate funding provided by last year’s Inflation Reduction Act. Repealing the IRS funding would add to deficits, according to the Congressional Budget Office, as it would reduce tax collections;

* Imposing work requirements for various federal programs, reportedly including Medicaid.

The group, which reportedly consists of more than 40 House members, is not proposing cuts to defense spending and Perry told Roll Call that Medicare and Social Security benefits would not be cut and should not be part of debt limit negotiations.

To ensure that their demands don’t result in a government shutdown and "to force Congress to pass appropriations in a timely manner," the group also proposed passing a pre-emptive stopgap extension of federal funding that would set non-defense discretionary spending at fiscal 2019 levels.

Perry called the plan responsible and realistic, but many lawmakers outside the Freedom Caucus will disagree, meaning that the conservatives’ demands threaten to further complicate what’s sure to be a tortuous path to increasing the federal borrowing limit and averting a calamitous, market-rattling default on U.S. debt.

"A senior moderate Republican in the House, who requested anonymity to speak freely about the party’s internal dynamics, described the conservatives’ ultimatum on Friday as unhelpful while talks continue among the GOP’s leaders and competing factions," The Washington Post reported. And in an interview with MSNBC, Rep. Brendan Boyle (D-PA), the top Democrat on the House Budget Committee, called the Freedom Caucus demands "extreme on steroids" and "dead on arrival."

"Their list of demands reads more like a ransom note than a serious budget proposal," he said.

Biden warned that the Freedom Caucus demands would mean cutting all discretionary spending other than defense by 25%. "Now, that means cops, firefighters. It means healthcare," he said, adding that IRS agents would also be cut, leaving wealthy taxpayers facing less scrutiny. "I don't know. We just have a very different value set," he said.

The bottom line: Between Biden’s budget release and these conservatives’ demands, this year’s fiscal fights may have only gotten more challenging this week. "I don't know what there’s much to negotiate on," Biden told reporters on Friday, complaining that Republicans won’t have their budget ready for weeks.

Jobs Market Stays Hot

In a sign that the U.S. labor market is still chugging along, payrolls rose more than expected in February, as employers added 311,000 jobs, well above expectations of 225,000, the Bureau of Labor Statistics reported Friday. Although growth was weaker than in January, when the economy generated a massive 504,000 jobs, February was the 11th straight month in which employment growth exceeded expectations.

Wage growth continued, too, though the pace appears to be easing, with average hourly wages rising 0.2% from the prior month, the smallest increase in a year. Wages were up 4.6% on a 12-month basis, well above the pre-pandemic trend but lower than the increases seen last year.

At the same time, the unemployment rate rose from 3.4% to 3.6%, higher than expected though still exceptionally low. The increase was largely the result of more prime-age workers coming back into the labor market, with the labor force participation rate inching up to 62.5% – the highest level since the beginning of the Covid-19 pandemic in March 2020.

Sectors that were hit particularly hard by the pandemic, including restaurants, hotels and hospitals, have led the way in hiring in recent months as the economy continues its long slog toward something like normalcy. Those sectors of the economy that saw a boom earlier in the pandemic, including finance, tech and warehousing, have cooled, with layoffs becoming more frequent.

What the experts are saying: "The American economy continues to create an extraordinary number of jobs," economist Jason Furman said in a tweet, noting that the three-month average for monthly job growth is now 351,000. "This does not look like anomalous data," Furman added.

University of Michigan professor of economics Justin Wolfers agreed. "Holy smokes, another huge jobs report," he tweeted. "Revisions slightly negative," he added, referring to downward revisions in job growth of 13,000 for January and 21,000 for December, "but overall the economy is MOTORING."

Still, while wage growth continued, it also continued to fail to keep up with inflation. "We have by every definition the tightest labor market in years and yet, it was the 23rd consecutive month in which wages did not keep pace with inflation," David Kelly, chief global strategist at JPMorgan, told the Financial Times. "When push comes to shove, workers don’t have the bargaining power people think they have."

Some economists say the trendlines point toward something like a soft landing for the economy. "Job gains this strong and unemployment this low might be concerning in the face of stubbornly high inflation, but there are signs that the labor market is heading toward a strong, stable, and sustainable pace of growth," Nick Bunker of Indeed Hiring Lab said in a note.

Other analysts, though, say the report could push the Federal Reserve to bear down in its effort to slow the economy. "It’s much hotter than the economy can run, and so this means the Fed is going to have to continue to hike interest rates," PNC Financial Services chief economist Gus Faucher told CNN. "And that makes a recession more likely."

The bottom line: The February jobs report will likely influence the thinking of Fed officials as they mull their next interest rate hike later this month – an increase that some analysts think could be twice the size of the 25-basis-point hike announced at the previous meeting. However, today’s data sends something of a mixed signal, as wage growth shows signs of cooling, even as hiring remains strong. The ambiguity could push the Fed to stick with a steady approach, suggesting another small increase is likely.

"In absolute terms, employment is still strong and robust," Ray Farris, chief economist at Credit Suisse, told the FT. "But from the perspective of the Fed, the trend is slow but down, and probably leans more in the direction of their desire to move incrementally."

Deficit for Current Fiscal Year Hits $723 Billion

The budget deficit was $262 billion in February, according to the latest Monthly Treasury Statement released Friday. That brings the total deficit for fiscal year 2023, which began in October, to $723 billion.

The Treasury notes that deficits are typical in February. "February has been a deficit month 57 times out of 69 fiscal years as February is the first full month of the annual individual tax filing season and generally contains elevated individual tax refund levels, while also not containing a major corporate or individual tax due date," the report says.

The deficit for the full 2023 fiscal year is projected to be $1.4 trillion.