October 1st marks the beginning of a new fiscal year in Washington and as widely reported, a government shutdown.  Until Congress jointly authorizes the spending measure (known a the CR or continuing resolution) to pay for operations, non-essential services will come to a standstill while both sides dicker.  Usually it is normal to pass a CR funding an entire year but piecemeal authorizations may be the new normal due to ongoing contentiousness.  As of writing, an agreement has become stickier as the House attempts to roll back the Affordable Care Act, funding for contraceptives and other agenda items.

Coming up next:  The Debt Ceiling

A little over two years ago the world was riveted by brinksmanship between Congress and the President regarding the raising of the debt ceiling.  A lot was at stake including:

  • AAA debt rating of US sovereign debt,
  • US prestige as a safe haven for investors
  • Overall health of the US economy emerging from the deepest post WWII recession and more dependent on government spending than ever before.

In the heat of negotiations, each party fought for mutual concessions (spending limitations, sequestration if no agreement met etc.) and narrowly avoided reaching a “Grand Bargain.” Have we returned to those dark days?

Things to watch for and what keeps me up at night

The rancor surrounding the CR agreement and government shutdown will inevitably influence the debt ceiling authorization.  Since the October 17th deadline is imminent [1], the intransigence of both parties has the potential to seriously tamp down economic growth.   While the Federal Reserve did not explicitly address the current contretemps, it acknowledged fiscal restraint as a factor in its economic assessment last month.  Also noting general “improvement in economic activity and labor market conditions since it began its asset purchase program a year ago,” the bank’s decision to forestall bond purchase tapering provides some leeway if the government is shut down for an extended period.

Good things to remember

Today the financial markets are relatively sanguine about the drama in Washington (after a stock market decline of almost 2% in the last few weeks).  The situation is fluid and the Huffman Broadsheet will keep you up to date on market moving events.

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[1] Note, the government hit its statutory limit or $16.7 trillion in May and the Treasury has resorted to “extraordinary measures” to keep government payments flowing.  October 17th is an estimate by the Treasury.

 

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