It’s not business as usual in the nation’s capitol Tuesday morning. As of 12:00:01 a.m. Tuesday morning, the federal government was officially in a partial shutdown, the first in 17 years.
Following a drawn-out, late-night legislative Ping-Pong session on Monday, lawmakers in Congress failed to come to any kind of agreement to fund the government through the end of the year. The shutdown hinged on House Republican efforts to tie any compromise to a repeal or modification of the Affordable Care Act, President Barack Obama’s hallmark law. In various versions of its CR proposals, the House included a delay to the entire ACA, a one-year delay to the individual mandate, and an elimination of exemptions for lawmakers and their staff.
But the Democratic-controlled Senate would have none of that, standing firm on its desire for a “clean” CR. It also made clear it would not consider any proposal for short-term stop-gap funding. Each new proposal the House sent to the Senate for approval was immediately taken up, House amendments tabled, and kicked back to the House to try again.
Just after 1 a.m. on Tuesday, the House attempted to negotiate with the Senate by passing for the second time its third CR proposal, and requesting a conference meeting with Senators to try and hash out an agreement to keep the government funded. But the Senate declined to respond.
When the Democratic-controlled body gaveled into session around 9:30 a.m. ET on Tuesday, it is once again tabled the House-passed CR amendments, kicking the legislation back to the House. Essentially, Congress is, for the fifth time in two days, back at square one.
What Ever Happened to Compromise?
What could be worse than a shutdown of non-essential government services after a very publicized failure to compromise? Worry over whether, at some point, there will be a resolution to the shutdown.
In a note to clients Monday, Japanese investment bank Nomura said the outlook is bleak, and a timeline for negotiations could be longer than some expect.
“While Congress remains in session, our U.S. economists note that the path forward is not entirely clear, adding that it could take a week or more before the impasse over government funding is resolved. Indeed, the budget debate may carry through to the next and much more significant deadline of the debt ceiling,” the investment bank wrote.
Continue Reading Below
[An Inside Look at a Government Shutdown: What's Open, What's Closed]
Michael Block, chief strategist at Rhino Trading Partners said though there are no plans for members of Congress to meet and negotiate, he sees a light at the end of the tunnel.
“I see this dragging on another week before the Speaker blinks and cobbles enough support to pass a stopgap funding bill. Perhaps he gets rid of the excise tax on medical devices as a compromise from the Democrats. Perhaps not. Maybe this is finally the end for Boehner’s leadership in the House. I don’t think so, but time will tell,” Block wrote to clients.
The Other (Bigger) Fiscal Crisis
While the American people wait for transportation, education, and some defense funding to be restored, there’s an arguably bigger battle brewing in Congress and it’s more likely to have a much bigger impact on the U.S. economy if Congress, again, fails to come to the negotiating table.
On October 17, the U.S. Treasury Department will exhaust its “extraordinary measures,” according to Treasury Secretary Jack Lew. At that point, Congress must decide whether to increase the nation’s borrowing limit or risk a default, for the first time in history, on the government’s financial obligations.
In the event lawmakers fail to come to an agreement on the debt ceiling, many worry ratings services will begin to downgrade U.S. sovereign debt. In 2011, the Dow plunged more than 600 points in a single session as part of a days-long rout on the heels of Standard & Poor’s removal of America’s top-notch rating as fears pulsed across global financial markets.
The question is, though, what will the impact be this time around? The last time the government experienced a similar shutdown scenario in February of 1996, it lasted 21 days and, according to the Congressional Research Service, cost the U.S. about $1.5 billion. In today’s dollar, an equivalent shutdown is estimated to run about $2.29 billion, a calculation by FOX Business shows.
“As for the impact, we imagine a one week shutdown should shave just one or two tenths off of growth but the longer this drags on, the more impactful it will be. BTIG is less sure than some others of the second order effects on growth and as such, we are not sure a longer term shutdown will be as detrimental as more dire forecasts,” Dan Greenhaus, chief global strategist at market-maker BTIG wrote in a note to clients Monday.
Citigroup, in a note to clients late Monday, said all the political brinkmanship signals a neutral outlook for an agreement to come on the debt ceiling.
“On Thursday, House leadership floated a debt-limit bill that also included more than 30 other policy proposals, potentially forecasting more rounds of the ping pong game. A reasonable view of market risk suggests this uncertainty must carry over into the debt-ceiling debate even after the CR is finally resolved,” the No. 3 U.S. bank wrote.
But while many investors and analysts see the failure to compromise over the federal budget, Goldman Sachs said it would be a mistake to interpret that failure as a sign of greater risk for a failure to negotiate on the debt ceiling.
“We would be surprised if congressional Republicans would want to risk another difficult situation only a couple of weeks later. The upshot is that while a shutdown would be unnecessarily disruptive, it might actually ease passage of a debt limit increase,” the investment bank wrote in a note to clients last week.
The investment bank said it expects a deal to raise the debt ceiling by the October deadline, with little back-and-forth negotiations.
Congress Talks, Does Wall Street Listen?
In true “bad news is good news for the Street” style, Wall Street actually opened higher on Tuesday. That’s because traders are looking past the immediate crisis-mode scenario and fleshing out what it means for the Federal Reserve’s easy-money policies in the months ahead.
“All of this means that the FOMC is less and less likely to taper or tighten or even to make noises about doing any such thing this month or in December…This comes down to what the Fed itself has called ‘fiscal restrictions’ that cause them to not pull away accommodation,” Block noted.
Peter Boockvar, managing director and chief market analyst at the Lindsey Group, agreed in a note to clients Monday, saying the fourth-quarter risk to GDP that is likely to accompany the fiscal crises in Washington is reason enough to keep the Fed’s printing presses going at the same rate for at least another month or two – and that‘s the action that will continue to drive the markets higher, regardless of what happens in Congress.
Still, he speculated an agreement to restore partial funding to government operations will be tied into a debt-ceiling agreement by the middle of October.