Debt limits, social spending and infrastructure battles loom in “particularly frenetic time” for Congress

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U.S. lawmakers have a long list of things to do for the coming weeks – and financial markets could be rocked by the ensuing drama, analysts warn.

The coming month “probably looks like a particularly hectic time in Washington as it touches on federal spending deadlines, the debt ceiling and the ongoing budget reconciliation effort,” said Isaac Boltansky, research director. policy at Compass Point, in a note.

Congress must propose a funding measure before the federal government’s new fiscal year begins on Oct. 1 to avoid a partial shutdown, as well as increasing the federal borrowing limit this fall to avoid a U.S. default. Additionally, Democratic House and Senate leaders aim to push through a $ 3.5 trillion social spending program through a process known as budget reconciliation, while also implementing a plan for social spending. billion dollar bipartite infrastructure.

“We hope everyone was able to recharge in August, because September is shaping up to be an absolute mess,” Boltansky said. He wrote that the SPX market,
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DJIA,
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is also “eagerly awaiting clarification on the Fed’s reduction schedule as well as the White House’s plans for Fed leadership.” Overall, Capitol Hill has not produced a similar concentration of political risk for the markets since the tax wars ten years ago. “

Related: Powell’s future in question as Warren blames the Fed for being too easy on the biggest banks

And see : Decrease Your Pessimism – Federal Reserve Actions Won’t Derail U.S. Stocks, Barclays Strategists Say

The fall action will help determine President Joe Biden’s legacy, as well as whether Republicans can take control of the House or Senate in next year’s midterm election, according to Director James Lucier. General Manager of Capital Alpha Partners.

“The stakes for a major legislative program this fall could not be higher,” Lucier said in a note. “Biden is betting on his presidency and his recovery from the Afghanistan debacle. Democrats hope the ambitious legislative agenda will be a popular success and lock in Democratic dominance of Congress and the White House for years to come. “

Greg Valliere, chief U.S. policy strategist at AGF Investments, pointed out that moderate Democratic lawmakers were worried about the cost of proposals touted by their party leaders. One such lawmaker, West Virginia Senator Joe Manchin, last week reiterated his opposition to his party’s efforts to pass his $ 3.5 trillion package, as he called for a “strategic pause. “.

“A chaotic fall is looming in Washington, with prospects for further spending and massive taxes now uncertain – and a bitter struggle against the debt ceiling threatens to annoy financial markets by next month,” said Vallière in a note.

“The debt ceiling is still being raised, but this time will be nerve-racking amid threats to shut down the government,” he added. “Can massive infrastructure bills be passed in this climate?” A major haircut will be required, which could force angry House progressives to oppose infrastructure spending rather than accept reduced bills. “

Democrats have a narrow majority in the House and cannot afford more than three defections on the legislation if there is no Republican support for it. The Senate is split 50-50, with Democrats in control only because Vice President Kamala Harris can vote to break the tie.

Friction points in the $ 3.5 trillion package

Democrats in the House, Senate and White House continue to negotiate this week over the sticking points of the party’s $ 3.5 trillion package, but this week “doesn’t promise to offer much clarity to the party. The September 15 deadline is approaching.
for committees to consider their bills, ”said Benjamin Salisbury, research director at Height Capital Markets, in a note.

“The main unresolved points of contention include capital gains, SALT and whether to expand Medicare as advocated by Sen. Bernie Sanders (I-VT) or consolidate Obamacare as supported by the President of the Nancy Pelosi Room (D-CA), ”Salisbury added.

Biden has proposed increasing the maximum capital gains tax rate to 43.4% from 23.8%, while SALT refers to state and local taxes. Some U.S. lawmakers in high-tax states are pushing for the repeal of the $ 10,000 cap on SALT deductions that was put in place by the 2017 tax overhaul.

Senate Democrats are also reportedly considering a range of other possible tax hikes to fund their spending plan, ranging from levies on share buybacks and “virgin plastics” to a tax on “CEO pay gaps” .

“Americans should expect there to be a series of negotiations and ups and downs, and it’s going to be called dead several times over the next two weeks,” Jen Psaki told reporters Tuesday, White House press secretary while she was asked whether Americans should expect the reconciliation bill to cost $ 3.5 trillion by the time it is completed.

“What the president is focused on the most are the two measures he has proposed to cut costs for the American people, but also to ensure that wealthy businesses and individuals are encouraged to pay more. Both are important to him, and we’ll see how the negotiations go, ”she added.

The $ 3.5 trillion package calls for heavy spending on efforts related to “human infrastructure”, climate change and other Democratic priorities, with a recent New York Times report describing its approach as ” reweaving cradle to grave ”from the social safety net.

The price to pay is less than 3.5 trillion dollars

While Psaki hasn’t said whether the package will actually have a final price tag of $ 3.5 trillion, analysts are betting it will eventually be downgraded.

Boltansky of Compass Point said it was “easy to envision a scenario in which the effort fails due to demands from progressive or moderate Democrats,” but his store believes that in the end, “Democrats will have to. success, albeit with a less ambitious program “.

The likely figure will be between $ 2,000 billion and $ 2.5 trillion, he said. He stressed that Democrats believe they have a unique legislative opportunity and that history suggests they will lose their grip on the House next year.

Analysts at Beacon Policy Advisers said they expected the $ 1,000 billion two-party PAVE infrastructure,
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legislation and a “human infrastructure” bill costing around $ 3 trillion will become law.

“This has always been our baseline scenario, but we are rolling back the timeline for both of the end of the year to somewhere between early October and late November,” they said in a note.

Robert Schroeder of MarketWatch contributed to this report.


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