Election Day (November 8) will influence 1Q22 fiscal negotiations and outcomes earlier than is routine, with larger stakes for the president given the way 2021 ended. The Senate is set to return on Monday (January 3), three days before the January 6 anniversary of the violent attack on the U.S. Capitol. Negotiations and possible votes on the House-passed Build Back Better (BBB) legislation could be wrapped in renewed partisanship as Members debate or deflect what happened at the Capitol two weeks before President Biden’s inauguration.
Monetary policy is set to intrude on January fiscal uncertainties as Fed Chair Jerome Powell’s re-nomination hearing falls in the second week and the FOMC meets in the final week. That same week or shortly thereafter, Biden gives his first full-year State of the Union address. February too will be dominated by fiscal policy and Fed governor nomination hearings and ends with a presidentially ordered global value chains report from the National Economic and National Security Councils.
Momentum is an important asset for any second-year president and the opposition party. In 2022, Republicans have very limited incentive to help Democrats work through BBB or even a possible mid-February shutdown. That leverage in our view favors GOP demanding changes to the budget process and funding levels of FY22 remainder-year appropriations. BBB talks are likely to cause Democrats further pain, which could enhance that leverage. Against this backdrop, the president is scheduled to submit his FY23 budget plan by February 7.
The first seven weeks of the year should give markets a recalibrated look at 2022 domestic policy risks and the ability of Democrats to manage a politically vulnerable majority. Tangible risks remain low, but headline volatility will be a constant theme next quarter, at least through mid-February.
