After an uncharacteristically eventful August in Washington, Congress returns to D.C. for an even busier fall: In September, it has a mere 12 legislative days to fund the government for fiscal 2018 (and thus avoid a shutdown), raise the debt ceiling and address a smattering of other must-pass bills, including the reauthorization of the children’s health insurance program (CHIP) and the Federal Aviation Administration (FAA).
Although these tasks looked nearly Herculean a few days ago, they now appear more straightforward because of two recent and related developments: President Trump has backed off (for now) his insistence that funding for the border wall be included in the government funding bill, and the must-pass Hurricane Harvey emergency funding bill presents a vehicle to which the debt ceiling increase can be attached, all but guaranteeing its passage (at least through December).
Policy uncertainty is here to stay
While we think Washington will likely avoid a worst-case scenario in September and that investors will be able to breathe a sigh of relief, they should not become too complacent. As of now, it appears that Congress will only pass a two-month funding bill good through December, at which point President Trump has indicated that he will insist on border wall funding – a non-starter for Democrats that could potentially lead to a government shutdown.
A shutdown would not only be disruptive to the economy and markets, calling further into question the ability of policymakers to govern, but it would also distract from and further complicate the administration’s primary legislative objective: tax reform. As we’ve said since January (and keep saying!), tax reform (versus tax cuts) is inherently difficult – it took President Reagan, under much more auspicious circumstances, nearly three years from start to finish to sign the 1986 tax reform bill into law.
As of now, eight months into this Congress, we have not seen even a draft of a tax bill; moreover, as of now, Congress has failed to pass a fiscal 2018 budget (different from the fiscal 2018 funding bill), which is necessary to pave the way for passing tax reform with only 50 votes, as opposed to the usual 60 in the Senate. Our longstanding view has been that if we see any action on tax reform, it will likely be on a much smaller scale than many had hoped for, with a relatively insignificant impact on 2018 growth.
More bumps ahead for markets?
If President Trump’s legislative agenda stalls further, do not be surprised if we see him continue to exercise the policy levers over which he has unilateral authority, namely in the areas of trade and immigration, which fit into his “America First” stance and play well with his base. In fact, the administration’s recent decision to move forward with an investigation into China’s intellectual property, which may escalate trade tensions with China, as well as its announcement to end the Deferred Action for Childhood Arrivals (DACA) program, could be a foreshadowing of other policies to come and another source of uncertainty for markets.
The bottom line? While Washington will likely avoid some “forced errors” in September, the remainder of 2017 looks like it could be bumpy.
For more of our views on how U.S. policy may affect markets, see our Asset Allocation Outlook Midyear Update, “Preparing for Pivot Points.”
Libby Cantrill is PIMCO’s head of public policy and a regular contributor to the PIMCO Blog.