Partisans in Washington are not surprisingly pointing their fingers at the other political party for the blame. (UBS)

Partisans in Washington are not surprisingly pointing their fingers at the other political party for the blame. Yet, both parties are supporting and opposing different versions of plans to keep the government funded.

How long will the shutdown last? It’s hard to say, but we are predicting a range of a few weeks rather than a few days.

Government Shutdown This Weekend.

Given the House and Senate’s inability to agree on a short-term funding bill to keep the government open beyond this weekend, a government shutdown is set to commence at the first minute of Sunday morning (October 1). While most Americans won’t feel the effect of the shutdown immediately, some will. Over four million federal workers will stop receiving a paycheck, as well as many government contractors, though most will still have to report to work. The Senate this week moved through procedural hurdles to set itself up for passing a bipartisan funding bill this weekend that would extend the current level of funding for government operations for over six weeks (with USD 6 billion of funding for Ukraine and USD 5 billion for natural disaster assistance). Meanwhile, the House later today is set to take what is likely to be a final effort to pass a short-term bill favored only by Republicans. If that bill can pass, House and Senate leaders will work over the weekend to find a compromise between the two bills (see below). If the House cannot pass a partisan bill, House Speaker Kevin McCarthy (R-CA) will be pressured to bring up the Senate-passed bill, which would likely have the needed votes to pass.

If Speaker McCarthy brings up that bill, it would likely trigger a revolt among a small number of House Republicans who could and likely would force a vote on whether to remove the Speaker from his position (see below).

Issues to be Compromised.

If the House is able to pass a Republican-only bill, the House and Senate then would be poised to try to compromise on a final short-term bill (option 1 above). Negotiators would focus on a handful of policy and procedural issues needing resolution. The length of funding the government would be a first consideration. The Senate bill provides funding until November 17, but most House Republicans would want to shorten that period (October 31) to keep pressure on the negotiators. The Senate bill adds extra funding for Ukraine and natural disaster victims, which a majority of the House would likely support as well. However, many House Republicans would want those spending items to be offset by corresponding reductions in other federal spending, so the funds are not added to the budget deficit / national debt. Finally, House Republicans would demand border security reforms (to stem the influx of undocumented immigrants at the southwest border) that likely would be objectionable to Senate Democrats.

Immigration issues and proposed solutions divide Congress as much as any other issues these days, and this may be the last of the issues to be resolved if a compromise can be crafted.

A Vote to Replace Speaker McCarthy.

There has been discussion in some circles all year about the possibility of Speaker McCarthy losing his job. As we mention above, if the Speaker tries to pass any Senate-approved funding bill, he would anger a handful of House Republicans who have threatened to call for a vote to replace him if he follows that course. If there was a vote, the Speaker would likely lose his job unless a few Democrats unexpectedly decided to support him or skip the vote. If he loses the vote, House Republicans would have to select another speaker and there aren’t that many obvious candidates who could unite the various factions of the party. House Majority Leader Steve Scalise (R-LA) could be a viable alternative, but he has been dealing with serious health challenges (a cancer diagnosis). Congressmen Patrick McHenry (R-NC), Kevin Hern (R-OK), Tom Emmer (R-MN), Byron Donalds (R-FL) and Jim Jordan (R-OH) could be options.

We see no obvious alternative who would make House Republicans much happier.

The CIO View.

We asked our colleague in the Chief Investment Office, Tom McLoughlin, about his views on how the shutdown will affect financial markets, and he said the following: “The historical data from prior shutdowns suggests a limited impact. Market reactions this week and next week are more closely tied to inflation expectations and Fed monetary policy. The macroeconomic impact is limited unless the shutdown extends more than a couple of weeks – when the absence of federal government paychecks and the inevitable travel snafus begin to bite.”

For more, see Washington Weekly: Fight Over a Government Shutdown , U.S. Office of Public Policy, 29 September 2023.

Approval Date: 9/29/2023 Expiration: 9/30/2024 Review Code: IS2305848