The Next Installment in the US Fiscal Policy Epic: The Usual Theatrics

The BIF (infrastructure) has now been signed into law but there won’t be an impact before the mid-terms. Of the $550mn in additional spending most of it will get spent after November 2022. Time to turn our attention to BBB, government funding and debt ceiling.

BBB (Build Back Better) is unlikely to become law before Christmas: the CBO is to release its full estimate of the budget impact of the bill today. CBO scoring was a key demand from House Democratic moderates. The CBO estimates already released are in line with the Democrats’ so there is a good chance that the Bill could get voted by the House by the weekend. But then the Bill is likely to get modified in the Senate where both progressive and centrists have objections to the current House version. Centrists such as Joe Manchin remain lukewarm to a big spending package while progressives such as Sanders are likely to be opposed to regressive provisions such as a higher cap on state and local tax deductibility that would mainly benefit high income taxpayers. So even if the Senate takes up the bill before Christmas, which seems unlikely in view of other items on the Senate docket, it would have to go back to the House for another round of voting which makes it unlikely that it would reach Biden’s desk before Christmas.

Budget funding likely to get extended through another CR (continuing resolution, stop gap budget funding). The current CR expires on Dec 3^rd and new funding needs to be provided in order to avoid a government shutdown. We are very likely to see another CR extend government funding though it is not clear for how long. I am not sure this matters since neither party wants to shut down the government, so the most likely outcome is a series of CRs throughout FY2022 (i.e. until end September 2022).  The alternative would be a bipartisan budget bill which is highly unlikely given partisan divide, difficulties in closing down the deal on infrastructure that was much less controversial than the budget and growing proximity to mid-terms.

Debt ceiling likely to be raised through reconciliation. Secretary Yellen has put out a revised estimate of “X Day”, December 15^th from previously December 3^rd. Senate leaders Schumer and McConnell have started discussing the issue. The Democrats want GOP support for suspending the debt ceiling while the GOP wants the Democrat to raise the debt ceiling on their own through reconciliation. Neither party wants to be seen as causing a default, so I expect a compromise to be struck. Current talk is of an expedited reconciliation process where the GOP would abstain from requesting debates and amendments as allowed under reconciliation rules. This makes sense to me as Schumer’s bargaining position has been weakened by poor Democratic results in state elections and by President Biden’s low approval. I will get more concerned if there is no sign of progress by the end of the post-Thanksgiving week i.e. by December 3^rd.

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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