Dom’s Quick Take: Government Funding, Is This Time Different?

Summary

• Government funding for several agencies expires on 1 March.
• There is a chance of a temporary shutdown, with limited economic consequences.

Market Consequences

• A shutdown would likely be too short-lived to impact growth and inflation, and therefore Fed policy.
• I continue to expect the first Fed cut at the June FOMC meeting.

Routine Theatrics?

So far this year, I have dismissed GOP/Democratic wrangles over government funding as routine theatrics. The reason was that, historically, shutting down the government has hurt GOP electoral prospects – and the GOP would not do anything that could lower its chances of winning the White House and/or Congress.

This has been correct so far. Speaker Johnson has passed Continuing Resolutions (CRs) extending current government funding, using Democratic votes to sidestep the extreme right within his party. The extreme right wants Johnson to take a tougher negotiating stance on issues like immigration and border, expenditure cuts, EV subsidies, and gun control. Like his predecessor, ex-Speaker McCarthy, Johnson faces the risk of being voted out by his own party – a single GOP House Member can initiate a vote to dismiss him.

The Risk This Time

This time, there is a risk an agreement is not reached in time. Funding for the departments of Transportation, Veteran Affairs, Agriculture, Housing and Urban Development, and Energy expires on 1 March (funding for other government agencies expires on 8 March).

The Senate has already passed its appropriation bills for the agencies. The House still must pass its own version and agree with the Senate on a reconciliation, but it is currently in recess and will only return to session on Wednesday, two days before the March 1 deadline. There is a good chance that there will not be enough time to do so.

One solution could be to pass yet another CR, but the extreme right is against it. If it feels ignored, it could launch a vote to dismiss Speaker Johnson.

In addition to funding the government, House Republicans must also deal with a separate bill funding Ukraine, Israel and Taiwan defense. The Senate has passed the Bill, but so far Speaker Johnson has refused to bring it to a vote because he wants to include border restrictions the Democrats will refuse.

The Bottom Line

The incentives for the GOP have not changed. If voters perceive it as being unable to govern, it risks getting penalized at the polls. So I continue to expect an agreement will be found, either through appropriations or another CR. However, this may not happen by 1 March. Any shutdown would likely be too short-lived to have a macro impact.

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Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.

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(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)