What happens (or not) in the next two weeks could end up defining the presidency of Joe Biden in the United States. Congress needs to pass a spending resolution before the end of this month to avoid a partial government shutdown, and if it doesn’t raise the debt ceiling soon, a more serious crisis would result in late October , which could ultimately lead to non-payment.
At the same time, Democrats continue to try to pass the additional $ 550 billion infrastructure bill while advancing the proposed $ 3.5 trillion spending plan to be passed through a reconciliation process. The most progressive lawmakers continue to signal that they will vote “no” on the bipartisan infrastructure bill this Monday if they are unclear about the size and scope of the reconciliation bill.
Currently, the closure and the debt ceiling are tied to a reconciliation bill already approved by the House of Representatives, but that will not advance in the Senate, where more than 40 Republican senators are opposed to canceling the debt limit if This is tied to Biden’s social agenda.
The vote to end the debate in the Upper House on the combined debt ceiling and resolution package is scheduled for Monday afternoon , but is expected to fail. Subsequently, if both issues are detached from budget reconciliation, Congress could narrowly avoid a government shutdown by passing a rolling resolution before October 1 that would keep government open until early December.
“Whether or not the administration closes is a close decision and we will be watching Democrats in Congress, including House Speaker Nancy Pelosi, to see if there are any signs that the continuing resolution may be disengaged. If the administration closes, September’s employment report could be delayed, “said Andrew Hollenhorst, an economist at Citi.
In the 14 government shutdowns since 1980 , the S&P 500 generated average returns of -0.1% on the expiration dates of the budget authority, 0.1% during the closing periods, and 0.3% on the dates of expiration of the budget authority. resolution. One notable exception was the most recent federal shutdown in December 2018, when the S&P 500 fell 2% on the expiration date of the spending authority .
“Equity market behavior around government shutdowns and debt cap clashes in 2011 and 2013 shows no consistent major S&P 500 reaction to these fiscal catalysts,” emphasizes Chief Strategist David Kostin from Goldman Sachs.
The stalking of a debt default
The biggest problem is that there does not appear to be an easy way to raise or cancel the debt ceiling in mid-October , which is when estimates suggest that the Treasury Department will exhaust the “extraordinary measures” it is currently using to maintain its responsibilities. financing. Senate Republican leaders have said they will not support an increase in the debt ceiling as long as Democrats seek to increase spending by $ 3.5 trillion .
It is possible that a sufficient number of Republican moderates in the Senate will break ranks and vote for a raise, but that surely won’t happen until the government gets dangerously close to default . The alternative is that Democrats can approve an increase through additional budget reconciliation. But that would be a last minute move, since Democrats do not want to be solely responsible for the increase in debt heading into next year’s legislative elections. The result is that, as in 2011 and 2013, the situation continues “in extremis”, posing a threat to confidence and recovery.
“A debt ceiling crisis could derail the Fed’s plans to begin reducing its debt purchases at the FOMC meeting in early November,” warns Paul Ashworth, chief economist at Capital Economics.