Both Senate leaders are on record dismissing any chance of a December government shutdown or default, which puts the 4Q21 fiscalamity odds at zero. We have yet to learn the price Majority Leader Chuck Schumer will pay for this de-escalation of uncertainty, but short-term funding of government into 1Q22 and a debt ceiling expiration before the midterms might be the charge.
Our three-scenario outlook for President Biden’s social and economic package remains unchanged. The core is that Build Back Better (“BBB”) will be sent to President Biden at a final tally of $1.5 – $1.8 trillion by December 23rd, or so. The second likelihood includes enactment of the same number but stretching the timing into as late as February. Of course, it’s possible, but we think unlikely, that BBB’s legislative apex was House passage last month.
On appropriations it seems increasingly unlikely a seven-quarter topline number to cover the remainder FY22 and FY23 is viable. Senate Appropriations Committee Ranking Member Richard Shelby and his House counterpart Representative Kay Granger changed their stance about a month ago. They had been negotiating a nearly two-year deal with Democrats, but those talks broke down. The result is Republicans are forcing Democrats to manage through a few fiscal deadlines heading into November 2022. A January/February deal covering six quarters is possible but not yet certain (the so-called omnibus bill). In the meantime, we expect that Congress will pass another stopgap measure before the December 3 deadline. Of course, a brief shutdown over the weekend is possible as a few Republicans plan to protest vaccine mandates.
Compelling Factor
The calendar is the action driver. Schumer earlier this week said he would bring the Senate version of BBB to the floor the week of December 13, which would allow time for the House to react to Senate amendments. SALT, paid family and medical leave, a few climate items, prescription drugs and immigration are some of the higher profile provisions yet to be resolved in the Senate and between Democrats of the two bodies. The Senate parliamentarian will rule on whether prescription drugs and immigration as currently written adhere to the budget rules for reconciliation, and possibly other amendments. This will add drama to the Senate process and possibly to Senate/House final negotiations.
Secretary Janet Yellen informed Congress that Treasury is unlikely to make it through December without additional authority to borrow ( and the CBO recently agreed). Whether Democrats are forced to address the issue on their own via a second reconciliation bill or a bipartisan compromise is achieved, time remains in the month for them to avert default.
Outlook
Fiscal policy likely is nearing its denouement for markets, at least from an upside perspective. And while we do not believe the end to muscular fiscal expansion naturally leads to another austerity cycle, economics and politics likely are forming to remove any new fiscal thrust after BBB (with slight but some risk it ended with infrastructure).
