This Week:

The Senate confirmed various Biden administration judicial nominees. The House passed a Senate-passed bill that would nullify employer-mandated nondisclosure agreements related to sexual assault or harassment. Both the Senate and House worked on the annual defense authorization bill and legislation to extend government funding for fiscal year 2023 beyond December 16 (see below).

Next Week:

Both the Senate and House will be out of session to celebrate Thanksgiving and will return to Washington the following week.

The Lead

Lame Duck Session.

Congress will work over the next six weeks to try to wrap up remaining legislative priorities. The first order of business will be the extension of government funding beyond its current expiration date of December 16. This debate will feature partisan wrangling over the composition of funding and the possible inclusion of controversial riders. The other must-pass item for Congress is the annual defense authorization bill, which has been passed on time for 61 consecutive years. There also will be interest in passing bills on consumer privacy protections, restrictions on the technology sector, reforms to the electoral college and energy infrastructure permitting reform (after a controversial provision on that was excluded from a short-term government funding extension Congress passed in September). Though Congress sometimes has greater appetite for bipartisan agreements after an election, most of the aforementioned bills (other than government funding and defense authorization) will be kicked over into the new Congress in 2023.

Government Funding Bill.

Congress needs to pass a government funding bill before current funding expires on December 16. Lawmakers will likely work right up to that deadline to secure a compromise bill. Given the need for a bipartisan agreement, this will be a challenging exercise. There is wrangling over specific funding priorities, with Democrats generally seeking more money for domestic programs and Republicans generally seeking more in defense spending. The alternative to the passage of a bill – a government shutdown – is sufficiently unattractive to nearly all lawmakers that a compromise agreement should come together. The big question is the duration of new spending. Will it cover the entire fiscal year (through September 30 of next year) or will it last only a month or two to allow the next Congress to craft a new bill? The latter scenario seems more likely to us at this time, and we expect another donnybrook over government funding to occur early next year in divided government.

Key Election Takeaway.

The support of independent voters was able to tip the scales for Democrats in various House and Senate races. These important voters helped lead Trump to victory in 2016, Democrats in 2018 and Biden in 2020. They were widely expected to deliver more votes for Republicans this year due to historical trends favoring the political party out of power and the President’s current low approval ratings. That changed when many of these voters decided that their concerns about Trump and threats to democracy were more important than those about Biden, inflation and crime. It’s not clear whether this was the prevailing sentiment throughout the campaign season or whether it was a development that occurred closer to election day. Going forward, the importance of these independent voters in key swing states should play a role in determining who comes out of the party primaries (particularly on the Republican side) in 2024. Some Republican voters and leaders are already moving away from a Trump candidacy and it’s hard to imagine that this trend won’t continue over the next few months. While Trump could enter the Republican primary as the favorite, he will face stiff competition.

Other Issues

Retirement Policy Reforms.

Over the course of the year, we have discussedthe potential for Congress to pass a retirement policy bill into law. This package, which contains several dozen changes in retirement policy, has very broad bipartisan support. In particular, the bill would increase the required minimum distribution age to 75 and increase catch-up contributions for those aged 62-64. It also would allow companies to match the student loan payments of their employees with contributions to those employees’ retirement accounts. This bill will be part of the discussion as Congress looks to finish off this year’s activities. The dealmaking at the end of the year can be unpredictable, but we remain optimistic about the prospects of this bill becoming law before Congress turns off the lights for the holidays in December.

Debt Limit.

One looming issue is the need to raise the debt ceiling in order to avoid a catastrophic default. The current debt limit, which was last set by Congress in 2021, stands at $31.4 trillion. With federal debt recently surpassing $31 trillion, the government will be bumping up against that limit early next year, though the Treasury can and will deploy cash management tools called extraordinary measures to stave off a default for additional months. In the last 10-15 years, raising the debt ceiling has gone from a perfunctory process to a highly fraught political exercise that has at times sent markets careening. Republicans will look to extract budgetary concessions (reforms to entitlements and/or cuts to domestic spending) to which Democrats, including President Biden, will be very resistant. To avoid the brinksmanship next year, there will be a push to increase the debt ceiling in the lame duck session next month. Democrats could try to pass it on their own through the reconciliation process, but there isn’t sufficient time for that. Alternatively, a debt ceiling increase could be incorporated into the must-pass funding package, but that would require the votes of at least ten Republicans in the Senate. Given that this Republican support is unlikely to be forthcoming, markets should plan on debt-limit drama next year.

Crypto Collapse.

The regulation of digital assets was front of mind for many lawmakers this week following the implosion of major crypto exchange FTX. At Senate and House hearings this week, some Republicans were critical of federal banking regulators for not providing sufficient guidance to banks to allow them to provide custody and other services on digital assets. In hearings next month, House and Senate committees will more directly examine the circumstances of FTX’s demise and its implications. Beyond these oversight activities, Congress has been active for months in developing relevant legislative proposals. One bipartisan bill in the Senate would give the CFTC authority to regulate digital commodities like Bitcoin (other digital assets that are securities would be subject to SEC jurisdiction). However, that bill has suffered a big setback given that it was supported by FTX. Another bipartisan bill in the House would establish federal regulation over stablecoins, which are digital assets issued by private entities but backed by other assets, including fiat currencies like the dollar. Though stablecoins were not directly implicated in the FTX collapse, Congress will try to advance this legislation in the next session in part as a way to demonstrate its responsiveness to the growing turmoil and risks in digital asset markets.

Tax Extenders in Play.

One item that could be included in one of the year-end packages is a set of tax provisions that have expired or are about to expire. These provisions include quicker depreciation for racehorses and a tax credit for mine rescue training, among others. One other significant provision would allow research and development (R&D) expenses to be immediately expensed. Without congressional action, these expenses would need to be amortized over several years, which would negatively impact companies in sectors like defense, technology and pharmaceuticals that invest heavily in R&D. This package is being negotiated now, but there are two main complicating factors. First, Democrats want to renew the increased child tax credit, something Republicans have resisted. Second, Republican lawmakers may want to wait until next year when they have a Republican majority in the House. This will come into focus after Thanksgiving, but as of today, we are somewhat optimistic that these tax items, including a more favorable R&D tax credit, will be included in the funding bill.

Unfinished Business.

As mentioned above,Congress has a packed lame duck session that will focus on legislation pertaining to government spending and a reauthorization of defense programs. That will leave almost no time for many other significant priorities. One area is antitrust and competition policy. The House Judiciary Committee last year and the Senate Judiciary Committee early this year each passed legislation aimed at curbing anti-competitive practices by big tech companies on their platforms, but the bills have hit a wall in the House and the Senate bill doesn’t appear to have the needed 60 votes to overcome that body’s procedural hurdles. Another is a bill to establish national standards on data privacy. A House committee passed a bipartisan bill, but that bill is a nonstarter in the Senate. Supporters of a cannabis banking bill will try to attach that to a must-pass bill, but it likely will end up on the cutting room floor as it has in the past. With a crowded agenda and tight timeframe for the lame duck, many issues will fall by the wayside.

The Final Word

Leadership Elections.

With Democrats very narrowly maintaining control of the Senate, and Republicans holding a slim majority in the House, both parties have questions about who they will have in positions of leadership. Senate Majority Leader Chuck Schumer (D-NY) is expected to keep his position without any challenges after a better than expected election cycle for Democrats. Meanwhile, Senate Minority Leader Mitch McConnell (R-KY) was able to fend off a late challenge from Senator Rick Scott (R-FL) earlier this week to become the longest serving Senate party leader. House leadership questions, however, are far from settled. While current House Minority Leader Kevin McCarthy (R-CA) won the Republican nomination for Speaker, he fell short of the 218 votes that he’ll need in January when the entire House votes on the next Speaker. At this point, Leader McCarthy appears to be the only viable candidate who can win the Speakership, but he will certainly have his work cut out for him over the next two months as he works to shore up his votes among a few malcontent Republicans. House Democrats have even more questions following House Speaker Nancy Pelosi’s (D-CA) announcement that she will depart from leadership. This long awaited opening has set off a scramble for many different leadership positions. Congressman Hakeem Jeffries (D-NY) is the frontrunner to take the top spot among House Democrats. This process will provide an opportunity for some emerging Democrats and result in some new blood in the ranks of congressional leadership.