Policy Week in Review - Congressional Republicans Split on Reconciliation 3.0, MOU Signed with Iran, and FISA Hits New Roadblocks

Key Takeaways

• A split has emerged between House and Senate Republicans on how and whether to proceed on a third reconciliation bill.

• House Republicans are hopeful and plan to move ahead.

• Senate Republicans are doubtful and preparing other paths for defense spending.

• The House Budget Committee will move a reconciliation vehicle soon and hope the Senate can be persuaded to get on board.

• Trump signed the 14-point MOU with Iran amid criticism from pundits on the right.

• Congressional Republicans, however, will defend the deal and hope for the best.

• Federal housing program reform and investor home purchase ban will soon pass.

• The highway trust fund will need cash infusion of over $275 billion.

• Trump signaled that he is unlikely to support wholesale renewal of USMCA.

• Without support from all three nations, the deal will be subject to annual review. 

Divergent Plans Emerge for Reconciliation 3.0

The House and Senate will set their sights on supplemental defense spending now the memorandum of understanding (MOU) with Iran has been signed and immigration funding is in the rearview. Each chamber will start the process with different ideas on how to move forward. The key decision point is whether or not Republicans should try to use budget reconciliation for the third time in the 119th Congress. Here’s a look at the two viewpoints and thoughts on if they can come together. 

House Republicans Are Hopeful and Moving Ahead

House Republican leadership has a completely different view of reconciliation than their Senate counterparts. Speaker Mike Johnson (R-LA) believes that he needs to deliver more legislative victories for members running in tough midterm races to tout back home. It is especially important for the House to pass legislation designed to address affordability, whatever policy form that takes. 

Where the Senate sees the process splintering its Republicans, the House feels like another reconciliation effort could galvanize its conference. This is why the House is going to move forward with the process starting with a budget resolution and reconciliation instructions in the coming weeks. Here are some of the characteristics that we believe will define the House bill.

• A limited policy scope much smaller than the One Big Beautiful Bill (OB3), which has a non-defense price tag in the hundreds of billions instead of trillions. 

• Tax cuts and spending that is fully offset to appease deficit hawks. 

• Targeted tax relief meant to help middle-class, not upper-income, earners.

• Tax relief and cost recovery for homebuilding to address housing costs. 

• Savings derived from cuts to address waste, fraud, and abuse in welfare programs by tightening eligibility and ending improper payments. 

• Up to $350 billion for Iran operations and supplemental defense spending.

• Little or no major policies on healthcare, which is still too controversial. 

The House thinks that they can move forward first and bring the Senate along. They will also have the help of President Trump, who presumably will support reconciliation to fast-track his defense spending priorities. Still, most observers in D.C. believe that it is a long-shot for a bill to get to the finish line. 

Senate Republicans Are Doubtful and Making Alternative Plans

Senate Republicans are generally doubtful that another partisan reconciliation plan can pass this year. According to reports, GOP Senate leadership is throwing cold water on the idea. Instead, there are plans to move a defense spending bill that would require 60 votes and bipartisan support.

There are indeed a number of reasons why Senators may think that Reconciliation 3.0 will be a tough lift:

• A bill that includes cuts to mandatory programs combined with spending for military operations is politically troublesome for moderates running for re-election. 

• The process requires two difficult votes – the budget resolution and the final bill. 

• There are at least six Republican senators who are either lame ducks or otherwise unsusceptible to White House pressure.

• Reconciliation opens two “vote-a-rama” sessions with politically difficult votes.

• Spending through reconciliation bypasses increasingly annoyed appropriators. 

Despite these concerns, reconciliation is still the only way that Republicans have scored big wins on spending and taxes since Trump took office. The same was true for Democrats under former President Biden. For that reason, the House is moving forward. 

U.S. and Iran Sign 14-Point Memorandum of Understanding

On Wednesday, President Trump and Iranian President Masoud Pezeshkian signed a memorandum of understanding (MOU) that ends hostilities, reopens the Strait of Hormuz, and begins the process of reaching a permanent peace agreement. Highlights of the MOU include:

• The immediate and permanent termination of military operations on all fronts, including Lebanon.

• The U.S. and Iran commit to negotiating and achieving a final deal within 60 days, which can be extended with mutual consent.

• The U.S. will end its naval blockade.

• Iran will open the Strait of Hormuz.

• The U.S. will develop a $300 billion reconstruction and economic development plan for Iran as part of the final deal.

• The U.S. will lift sanctions on Iran under an agreed-upon schedule as part of the final deal.

• Iran shall not procure or develop nuclear weapons, and the U.S. and Iran will resolve the disposition of Iran’s enriched nuclear materials.

• The final deal will be endorsed by a binding UN Security Council resolution.

Even with the MOU in place, administration officials emphasize that “all the options will continue to be on the table” if no progress is made in reaching a final deal with Iran, and President Trump has underscored the requirement for Iran to permanently end attempts to obtain nuclear weapons.

Since the deal was announced, shipping traffic has markedly increased through the Strait, including the passage of three Saudi Arabian supertankers carrying 6 million barrels of crude oil. Oil prices are also falling close to their prewar levels, which should soon translate into lower energy costs for consumers. 

While reports have emerged citing Republican pessimism about the deal, very few elected officials in the President’s own party have publicly denounced the agreement. Most are defending the MOU for the time being. Since the agreement does not require a vote there won’t be an immediate mechanism to put Congress on the required. We anticipate that end of the conflict and its attendant high gas prices is enough of a positive that the President’s party will generally defend the deal and hope for the best before midterms. 

Housing Reform Legislation Set to Become Law

The House and Senate agreed to a bicameral, bipartisan housing reform package earlier this week. The bill preserves much of the legislation passed overwhelmingly by the House a few weeks ago while also adding in a few Senate priorities. The bill maintains the same threshold for “large institutional investors” as the House bill (owning 350 or more homes). The Senate voted 84-8 on Thursday to invoke cloture. Final passage in the Senate is expected on Monday. With the blessing of House and Senate committee leadership, we expect the bill to easily pass both chambers in the near future and head to the President’s desk for his signature. 

Highway Trust Fund Needs Record-Breaking Cash Transfer

On September 30, 2026, federal transportation, highway, and mass transit programs will expire and require reauthorization for the first time since 2021. The legislation will also address the federal highway trust fund (HTF) shortfall that consistently occurs as outlays outpace revenue from the federal gas tax. 

As Congress makes plans to address the expiration this fall, the Congressional Budget Office released a report showing the HTF balance will be depleted in 2027. To fill expected shortfalls, the next highway bill could require a general Treasury transfer of more than $275 billion. If Republicans want to pay for the fix, it will further complicate a busy legislative schedule heading into the midterms. 

First Federal Reserve Meeting for Chairman Warsh

The Federal Reserve voted unanimously to keep interest rates steady at 3.50 to 3.75% during its meeting on Wednesday, noting “productivity growth and capital investment are strong … [and] job gains have kept pace with the workforce.” The statement also acknowledged that inflation remains elevated, noting the impact of “supply shocks” in certain sectors, specifically energy. 

The meeting was Kevin Warsh’s first meeting as Chair of the Federal Reserve. In a statement to the press, Warsh noted that changes would be coming to the Fed, including shorter, simpler statements, and the appointment of five task forces to review operations of the Fed, including: 1) communications; 2) balance sheet policy; 3) the Fed’s reliance and use on existing data sources; 4) productivity and jobs; and 5) the Fed’s inflation frameworks. 

FISA Reauthorization Hits New Roadblock

Last week, Democrats thwarted passage of a bipartisan reauthorization of Section 702 foreign surveillance authority as part of the Foreign Intelligence Surveillance Act (FISA). The reauthorization hit another roadblock this week over concerns about President Trump’s selection of Federal Housing Finance Agency (FHFA) Director Bill Pulte as Acting Director of National Intelligence. As a result, the authority expired last Friday evening. 

President Trump nominated Jay Clayton, U.S. attorney for the Southern District of New York, late last Thursday in an attempt to assuage Democratic concerns, Since that time, the President made two demands that once again put the reauthorization in jeopardy:

• President Trump directed Mr. Clayton not to appear for his nomination hearing this week before the Senate Intelligence Committee until his replacement to serve as U.S. attorney for the Southern District of New York is confirmed. Traditionally, senators from the home state of nominated U.S. attorneys (in this case, Democratic Senators Chuck Schumer and Kirsten Gillibrand) are able to “blue slip” or offer endorsement or disapproval, on those nominees before the Senate considers a nomination, and, in this case, are unlikely to do so. The nomination hearing was ultimately postponed.

• In the same statement, the President stated that he would not sign any FISA reauthorization that did not also include the SAVE America Act, which would implement national voting reforms including ID requirements. The SAVE America Act has stalled in the Senate for months without the necessary votes to move forward. Senate Majority Leader John Thune (R-SD) said earlier this week that the Senate will attempt to pass a FISA bill without voting reforms. 

President Trump Raises Doubt About Wholesale Renewal of USMCA

This week President Trump expressed his preference not to extend U.S. participation in the United States-Mexico-Canada Agreement (USMCA), although he stopped short of committing to withdraw. According to the President, “I would rather not have the agreement, but I may sign it … We do better as a country if we don't have ​an agreement.”

The Administration has long signaled its stance that the USMCA has had substantial shortcomings. In his December testimony before Congress, United States Trade Representative (USTR) Jamieson Greer highlighted concerns such as the erosion of U.S. supply chains, protectionist Mexican energy policies, Canadian dairy market access commitments, and the need for more stringent mechanisms to penalize offshoring to Mexico and Canada. According to Greer, “USTR’s view is that, whatever the USMCA’s value to the United States and even North America, the shortcomings are such that a rubber stamp of the Agreement is not in the national interest.”

Under the terms of the joint review process, the USMCA must be reviewed by each country after six years. Unless each party confirms it wishes to continue the agreement for a new 16-year term, the USMCA Commission will “conduct a joint review every year for the remainder of the term of this Agreement.”  

At this point, we expect that the U.S. will continue negotiations to improve the terms of the USMCA without committing either to renew or withdraw. That means the USMCA Free Trade Commission - composed of government representatives from each nation - would then meet annually to conduct a joint review for the remainder of the term of the agreement.