With Congress out for its annual August recess, the next few weeks in Washington may be the calm before the storm: When Congress returns in September, it will have to deal with several high-stakes fiscal deadlines at the same time the Federal Reserve deliberates over when to raise the policy rate.
When Congress returns on September 8, it will have a mere 12 legislative days to come to a resolution to fund the government (at the same time it will grapple with whether to block President Obama’s Iran deal and host the Pope); if no funding bill is passed by September 30, the government will shut down. Although Congressional Republican leadership has openly rejected the possibility of a shutdown, major divisions remain between (and within) the parties over the levels at which to fund the government and also whether non-funding “policy” riders (e.g., to defund Planned Parenthood) should be attached to the bill.
In addition to the government funding bill, Congress will have to pass a highway funding bill by October 29 and will have to raise the debt ceiling above the $18.1 trillion limit by November (or December) – an issue that Republicans will likely use to extract concessions from the president.
No one knows for sure how these issues will be resolved, even those at the center of them. While some optimists assert that these coalescing deadlines could facilitate both sides to negotiate a big, bold deal, we think this is unlikely given the short timeframe and the general antipathy between the parties (not to mention, chilly relations between Congress and the Obama administration). That said, we also think the chances of a government shutdown and debt ceiling breach are relatively low since Republican leadership has no political incentive to allow for these outcomes (caveat: the same thing could have been said in 2013, when the government did shut down despite Speaker John Boehner’s objections).
Bottom line for investors? Expect a noisy fall with corresponding heightened policy uncertainty as Congress grapples with these significant fiscal deadlines. If past is prologue, we can expect intense drama and brinkmanship during the days and weeks leading up to the deadlines, culminating in a series of eleventh-hour compromises that largely maintain the status quo. However, heightened policy uncertainty means a higher chance of policy mistakes, and there is no doubt the Fed will be monitoring developments closely as they contemplate when to raise the policy rate.