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Treasury Secretary Testifies to the House Financial Services Committee

May 13, 2025

U.S. Treasury Secretary Scott Bessent offered his first annual testimony to Congress last week before the House Financial Services Committee. In a lively hearing, lawmakers debated a broad range of topics, including tariffs and cryptocurrency.

The big picture: 

• Republicans, led by Chairman French Hill (R-AR), praised Bessent’s “America First” strategy that aims to bring jobs back to the U.S. through tariffs, tax cuts, and efforts to reduce red tape. They called for tough stances on China, stricter rules on American investments going abroad, and reforms to global institutions like the International Monetary Fund and the World Bank.
• Democrats led by Rep. Maxine Waters (D-CA) slammed the administration’s tariffs, blaming them for shrinking the economy and driving up prices. Rep. Nydia Velázquez (D-NY) demanded more transparency on trade negotiations. Bessent responded, saying:

• Bessent promised changes that would level the playing field for U.S. financial institutions and signaled he would take significant industry feedback to inform any re-written endgame proposal: 

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House Releases Tax Bill Text 

May 13, 2025

The House Ways and Means Committee on Monday released 400 pages of text detailing the tax portion of the reconciliation bill, titled “One Big Beautiful Bill.” 

• The committee will hold a markup today at 2:30 pm, but it is likely the legislation will continue to evolve as it advances. 

Why it matters: This is the first draft of legislative text for the tax bill that broadly reauthorizes the 2017 Tax Cuts and Jobs Act, raises SALT caps, and delivers on a number of President Donald Trump’s tax priorities. 

• Treasury also released an updated “X date” in mid-August for the debt ceiling, which adds pressure to lawmakers to pass the bill by July. 

By the numbers: Of interest to CREFC members, the following provisions represent neutral or lower tax liability, as written: 

• $30,000 Individual SALT Cap: The bill raises the cap to $30,000 for all taxpayers with a phase-out for incomes above $400,000.
  • Raising the state and local tax deduction (SALT) limit from $10,000 is a red line for at least five blue state Republicans. A $30,000 cap was floated last week, which several members of the caucus rejected.
  • However, the Senate and other Republicans are opposed to too much relief for SALT.
• No Business SALT Cap: There are no provisions to cap business state and local income or property taxes. 
• 199A Passthrough: Qualified business income deduction increases to 23% from 20% and is made permanent.
• No Carried Interest Rollback: President Trump had reiterated his push to close this “loophole” in a call last week with Speaker Mike Johnson (R-LA). The bill does not change carried interest treatment. 
• Low-Income Housing Tax Credit (LIHTC) Boost: The bill would increase the state housing credit ceiling and lower the tax-exempt bond requirements, similar to the 2024 Wyden-Smith Bill.
• Renews Opportunity Zones: The bill authorizes a new round of Opportunity Zone designations, starting on Jan. 1, 2027, and ending on Dec. 31, 2033. Some tweaks were made to various low-income definitions. 
• Bonus Depreciation Made Permanent: Allows full expensing of qualifying property.
• Interest Expense Deduction: Increases the cap on the deductibility of business interest expense for taxable years beginning after 2024 and before 2030 by allowing the EBITDA definition of taxable income.

Additional tax cuts: The TCJA provisions are largely made permanent with some minor adjustments to brackets. Lawmakers delivered on the White House’s priorities. 

• No Top Tax Bracket Increase: In a call with Speaker Mike Johnson (R-LA), President Trump renewed his effort to increase the top tax bracket on earners taking home more than $2.5 million. This provision is not in the bill.
• White House Individual Tax Priorities: The bill eliminates taxes on tips, overtime, auto loan interest, and adds an enhanced standard deduction for seniors (+$4,000). The provisions expire after four years, unless renewed. 
• Factory Expensing: The bill allows 100% expensing of certain real property used for manufacturing. 
• Tax Bracket and Standard Deduction Boost: All tax bracket amounts, except the top rate, will receive an upward inflation adjustment of 2%. The standard deduction increases by $2,000 for joint filers and $1,000 for individual filers. 
• Child Tax Credit: Increases from $2,000 to $2,500. 
• Estate Tax Exemption: Permanently increases to $15 million and is tied to inflation adjustments going forward. 

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Financial Regulations Update

May 13, 2025

The Trump administration continues to round out leadership in the financial regulatory landscape. 

• The panel advanced Bowman's nomination in a 13-11 vote. According to American Banker, Bowman “is expected to sail through the full Senate vote relatively easily as both the industry and Republicans have stood behind her nomination.”

On May 9, President Donald Trump nominated Jonathan McKernan, a former Federal Deposit Insurance Corporation (FDIC) board member, to serve as Treasury’s undersecretary for domestic finance. 

• McKernan's previous nomination to serve as director of the Consumer Financial Protection Board, which was submitted in February and approved by the Senate Banking Committee in March, has been withdrawn.
• According to the Treasury Department’s statement, McKernan “has become an integral part of the Secretary’s senior team” while awaiting Senate confirmation for CFPB director. 

As reported in previous CREFC Policy and Capital Markets Briefings, Treasury Secretary Scott Bessent has stated that Treasury will play a key role in financial regulatory rulemaking. According to Politico, “if confirmed to the Treasury role, McKernan would be a central part of the Trump administration’s efforts to roll back and reshape regulations on the financial industry.” 

• During the May 7 Annual Testimony of the Secretary of the Treasury on the State of the International Financial System, Bessent signaled he would take significant industry feedback to inform any rewritten Basel capital endgame proposal. He also criticized the “one-size-fits-all” approach to capital requirements and said that Treasury will “weigh in heavily” at the Bank for International Settlements (BIS) and other rulemaking entities:

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CRE Securitized Debt Update

Private-Label CMBS and CRE CLOs

One transaction priced last week:

• GSTNE 2025-FL4, a $901.3 million CRE CLO sponsored by Greystone Senior Debt Fund. The managed transaction is comprised of 13 whole loans and 15 loan participations secured by 28 multifamily properties in 16 states.

Transaction flow was subdued in April after a strong first quarter of issuance due to President Trump’s tariff announcement. 

• However, with volatility easing, issuers are bringing back sidelined deals and talking to borrowers about new ones. 
• According to Commercial Mortgage Alert, several transactions are in the market, including another CRE CLO and multiple conduit and SASB offerings.

By the numbers: Year-to-date private-label CMBS and CRE CLO issuance totaled $52.5 billion, representing a 76% increase from the $29.8 billion recorded for same-period 2024. 

Senior Benchmark Spreads Tighten Sharply

• Conduit AAA and A-S spreads were tighter by 11 bps and 15 bps to +92 and +135, respectively. YTD, they are wider by 17 bps and 30 bps.
• Conduit AA and A spreads were unchanged at +205 and +265. YTD, they are wider by 70 bps and 100 bps, respectively.
• Conduit BBB- spreads were unchanged at +615. YTD, they are wider by a significant 190 bps.
• SASB AAA spreads were tighter by 10 bps to a range of +127 to +150, depending on property type. YTD, they are wider by 20 – 35 bps.
• CRE CLO AAA and BBB- spreads were unchanged at +165 and +425, respectively.

Agency CMBS

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Energy Star Program May be Shut Off

May 13, 2025

The Trump administration’s fiscal year 2026 “skinny” budget, released on May 2, proposes to cut funding for Energy Star, a voluntary, market-based program run by the Environmental Protection Agency (EPA).

As reported by the Real Estate Roundtable, Energy Star is commercial real estate’s “most relied-upon public-private partnership with the federal government.” 

• In an April letter to EPA Administrator Lee Zeldin, real estate trade groups, including CREFC, noted that nearly 25% of U.S. commercial building floor space used Portfolio Manager, EPA’s secure, open-source, online software:

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Economy, the Fed, and Rates…

May 13, 2025

• U.S. tariffs on Chinese goods to 30% from 145% and 
• China's tariffs on U.S. goods to 10% from 125%. 

Why it matters: This eases immediate concerns about severe supply disruptions and sparked a market rally. However, Fed's Goolsbee and Kugler warn significant economic impact and uncertainty persist even with the deal.

Inflation: Calm before the Storm. April CPI (due Tuesday) is expected at 0.3% m/m and 2.4% y/y, but BofA flags holds that "core goods inflation likely accelerated… owing in part to tariffs," and BNP Paribas sees core CPI peaking around 4.4 % by late 2026.

Labor Still Looks Sturdy…for Now. 

• Payrolls added 177k in April, with the unemployment rate stable at 4.2%. 
• Yet, this could reverse if tariffs lead to widespread layoffs. 
• Chicago Fed's Goolsbee warns that even after Monday's truce, the tariff regime is "three-to-five times higher than before" and will still "make growth slower and prices rise."

Federal Reserve Policy

• Stuck on hold, staring down stagflation. The FOMC kept the fed funds rate at 4.25 – 4.50 %, highlighting "rising stag-flationary risks." Fed Chair Powell emphasized patience, using the term "wait and see" 11 times during his press conference, noting: 

• Dual-mandate dilemma. Powell says sustained tariffs could "generate a rise in inflation, a slowdown in growth, and an increase in unemployment," forcing the Fed to choose which target to wound.
• No rate-cut chorus. A barrage of Fed speakers (Williams, Kugler, Barr, Cook) echoed: wait for data; keep inflation expectations anchored. Barr bluntly warns tariffs could deliver "persistent inflation… and higher unemployment."
• Political heat rising. Trump's public jabs – Powell a "Fool" – renew debate over Fed independence, yet GOP lawmakers largely defend the chair, seeing him as a "stabilizing force."
• Rate-cut odds repriced lower. Futures now embed two quarter-point cuts for 2025, down from four in April, as optimism about less aggressive tariffs and inflation persistence has scaled back bets on the extent of easing.

• 5% Line in the Sand. BofA's Michael Hartnett argues that a durable move above 5% on Treasuries would "jeopardize the deficit-funding machine," likely forcing tariff roll-backs; foreign investors already hold $8.5 trillion of Treasuries, and CBO chief Swagel calls recent volatility a possible "tipping point" for their appetite.

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Tax Update: House Delays Action on Bill

May 6, 2025

Republicans delayed the rollout and consideration of key elements of the reconciliation legislation, including hearings on tax policy legislation and changes to Medicaid.

Why it matters: The House leadership still wants to pass a bill by Memorial Day, yet competing priorities among members of Congress and the White House are proving to be challenging. 

• SALT: Raising the individual state and local tax (SALT) deduction cap, currently $10,000, is still under debate. New York, New Jersey, and California Republicans have made raising this cap their “red line.” With a five-vote majority, they have enough votes to tank any bill without SALT relief. 
• Business SALT Cap: Colloquially known as B-SALT or corporate C-SALT, this provision has been under active consideration in House discussions. No details have emerged on what specifically would be covered, but conflicting reports indicate it would be pared down or potentially not included.
• Clean Energy Tax Credits: House Republicans have been targeting Inflation Reduction Act (IRA) tax programs as a way to reduce spending or offset some of the new tax cuts. But a group of 21 Republicans sent a letter in March urging leadership that any changes be “targeted and pragmatic” with a mind to future private-sector investment. Another group of 38 House Republicans sent a letter last week asking for a full repeal of the credits. 
• White House Priorities: While the President made no taxes on tips, overtime, and social security key campaign priorities, the White House continues to offer additional items. Last week, the White House told congressional leaders it would seek immediate and full expensing treatment for factory construction, both the buildings and the equipment. 

The big picture: The many loose ends on the tax front may contribute to a delay, but House leaders remain confident of meeting a May deadline. Challenges remain, however.

• The brewing fight on Medicaid, which Democrats are focusing their energy on highlighting, is raising political alarms for some Republicans and even the White House.
• Deficit hawks in the House continue to saber-rattle on spending cuts. Rep. Chip Roy (R-TX) and 20 House members sent a letter urging a number of “meaningful reforms” to Medicaid. 
• The Senate is not planning to mark up legislation, but it will likely have a heavy hand in moderating taxes or cuts once a bill passes the House. 
• The debt ceiling deadlines continue to loom over the entire legislation. Treasury is expected to clarify the “X date” in the next week or two. 

Contact David McCarthy (dmccarthy@crefc.org) with any questions. 

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Economy, the Fed, and Rates…

The Economy, the Fed, and Rates…

Economic Data

• GDP contracted 0.3% in Q1 2025, driven by a 41.3% surge in imports as businesses front-loaded shipments ahead of President Donald Trump's tariffs – imports subtracted five percentage points from GDP growth, marking the largest drag from net exports on record dating to 1947.
• April jobs report exceeded expectations with 177,000 jobs added vs. 133,000 expected, while unemployment held steady at 4.2%. "This jobs print came too early to capture the blow from 'Liberation Day' tariffs – we expect to see much weaker readings in coming months," said Bloomberg Economics.
• ISM Manufacturing PMI surprised to the upside in April, falling less than expected. However, production slowed along with supplier deliveries, while prices accelerated.
• Supply chain disruptions are mounting, with the Port of Los Angeles expecting shipments to drop 35% this week year-over-year. "It's almost like we're speeding towards a brick wall, but the driver of the car doesn't see it yet," noted a toy company CEO.
• McDonald's reported a 3.6% drop in U.S. same-store sales, the biggest quarterly decline since COVID, as uncertainty weighs on consumer spending. "Even $5 value meals have struggled to tempt customers," FT reported.

Federal Reserve Policy

• Fed poised to keep funds rate steady at 4.25 – 4.50 % on May 7, arguing that tariff induced inflation is a supply shock it can "look through" if jobs hold up.
• Markets are pricing in four quarter-point rate cuts this year, though the strong jobs report has prompted economists to push back timing expectations. Barclays and Goldman Sachs now forecast the first cut in July rather than June.
• Treasury Secretary Scott Bessent suggested the Fed should consider cutting rates, noting "two-year rates are now below fed-funds rates. So that's a market signal that they think the Fed should be cutting" – a rare comment on monetary policy from Treasury.
• Fed has "three tools to fight tariff-related inflation, none are ideal," according to analysts: raising rates (won't reverse tariffs), holding steady (allows inflation expectations to drift), or cutting rates (may reinforce price increases).

Treasury Yields and Markets

• 10-year Treasury yields rose to 4.31%, up 7 bps on the week, as strong economic data offset flight-to-quality flows from tariff concerns. Two-year yields jumped 8 bps to 3.82% after traders scaled back rate cut expectations.
• China quietly diversifies from U.S. Treasuries, with holdings down 27% since January 2022 to $759 billion. Officials are exploring agency CMBS and other alternatives amid concerns that "the safety of U.S. Treasuries is no longer a given."
• S&P 500 extended its winning streak to 10 consecutive days, the longest since 2004, erasing all losses from April's tariff shock. The index is still down 8% from its high reached on February 19.

Implications for CRE Finance

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The 2017 Tax Law and Today’s GOP: A Changed Landscape

May 6, 2025

The Republican Party in Congress has changed from what it was when President Donald Trump first came to Washington, D.C., eight years ago. Overall, the party has been more in lockstep with the President than during his first term, partially due to retirements and defeats bringing in new elected officials.

Why it matters: Political parties change over time, and the current reconciliation effort involves renewing key parts of Trump’s signature 2017 Tax Cuts and Jobs Act (TCJA). In 2017, Republicans had a larger House majority and the President had just come off an upset electoral victory. 

By the numbers: The polling website 538 published the following analysis, which examines how GOP membership changed between 2017 and 2021:

• By the end of Trump’s first term (January 2021), 132 of the 293 (45 %) Republicans who were serving in the Senate or House on Jan. 20, 2017 — the day of Trump’s inauguration — were no longer in Congress or had announced their retirement or resignation.
• Of the Republicans who replaced those who left Congress, 59% of their replacements were more conservative than the ones that held the seat prior, according to FiveThirtyEight.

The 119th Congress further illustrates this shift:

• House: 147 of the 220 current Republican House members (66%) have only served during the Trump era.
• Senate: 24 of the 53 current Republican Senators (45%) have only served during the Trump era. 

Tax Cut & Jobs Act-Era Republicans (January 2018): 

• House: 122 of the 220 current Republican House members (55%) entered Congress after the TCJA was enacted. 
• Senate: 22 of the 53 current Republican Senators (41%) entered Congress after the TCJA was enacted.

New Republican Senators-Post TCJA

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