The end of September is a time where key political issues could increase volatility and shake up financial markets. With the Federal Emergency Management Agency (FEMA) running out of funds to deal with the aftermath of recent disasters, Congress went to work. A disaster relief bill was proposed. U.S. Treasury Secretary Steven Mnuchin saw the bill as an opportunity to add a provision stating a suspension of the debt ceiling until after midterm elections in 2018. Democrats, however, seeking to maintain political pressure on the U.S. budget, leaned towards a more timely solution to the problem.
In the end, a bill was passed that suspends the debt ceiling and extends government funding for three months. However, the passing of the bill does not solve the underlying issues causing political and financial uncertainty. The Republicans are eager and hoping to pass tax reform by the end of the year. Currently, the plan is to use reconciliation to prevent a filibuster and force it through the Senate by majority vote. However, a few of the president’s priorities, such as border wall funding and cutting the EPA budget, are increasing bipartisanship among leaders.
“As long as both sides of the aisle hold out hope of using the debt ceiling for political gain, it will be difficult to come to an agreement that would lead to a viable, long-term solution” said Keith Knutsson of Integrale Advisors.
Looking ahead to 2018, politicians will focus their efforts on the November election cycle, making it even harder to vote for anything controversial because of the need to preserve constituent support. As a result, a debt ceiling increase would be a tough provision to pass. On the other hand, delaying the bill could help separate the budget from the debt ceiling. Now that government funding for fiscal year 2018 was passed, Democrats could utilize their leverage on issues such as immigration reform and health care.