With neither side showing any sign of compromise, the partial shutdown could extend until January, says Washington Policy Analyst Ed Mills.
December 26, 2018
The government is shut down; the Treasury Secretary is holding a meeting of the “plunge protection team”; press reports provide conflicting accounts related to President Trump’s discussion to fire the Chairman of the Fed; the departure of the Secretary of Defense, General Jim Mattis, has been moved up to January 1; and the State Department’s special envoy to combat ISIS, Brett McGurk, is following Mattis out the door.
Parts of the U.S. Government – including the Department of Homeland Security, Treasury, Commerce, and Department of Interior – remain closed following a missed deadline to agree on funding the border wall with Mexico. No deal is in sight and Congress is adjourned through December 27. This shutdown could easily stretch into January as the new Congress convenes January 3. The normal pressure on the personal lives of members of Congress and the president did not produce a deal, and neither side shows any real sign of compromise. There are multiple paths forward but no consensus yet on the most likely resolution. We believe an increase in funding above the $1.3 billion for the construction of metal fencing could give the president enough of a victory to accept the deal.
Plunge Protection Team
Secretary Mnuchin is set to convene the president’s working group on financial markets, a committee that was created in the Reagan administration to monitor the stock market. The meeting comes after Mnuchin held calls with the CEOs of the top six U.S. banks over the weekend. Following these phone calls, he reported that all banks have adequate liquidity and the markets are functioning properly. These actions, while appropriate given the recent sell-off, seem to raise more questions than answers – especially as no one had seemed to raise any concerns related to these issues about which Mnuchin is seeking to reassure the market.
The Secretary of the Treasury and the president’s Chief of Staff issued statements this weekend that the president will not fire/does not believe he has the authority to fire the Chair of the Federal Reserve, Jerome Powell. There is a debate about the ability of the president to “fire” the Chairman of the Federal Reserve, with question related to the ability to designate and/or appoint a new Chair. The Senate would need to confirm the president’s pick, and indications from the Senate is that there is no support for such an act. The longest-serving Republican on the Senate Banking Committee, Richard Shelby (R-AL), was critical of these reports over the weekend and supports the Fed’s independence. There are also reports that the president’s staff is discussing a potential Trump-Powell meeting. We do not believe the Senate would support any decision of the president to fire Powell, but the uncertainty created by these stories will add to the volatility surrounding each of the Fed’s decisions.
National Security Personnel Changes
Deputy Defense Secretary Patrick Shanahan will take over as acting secretary for departing Defense Secretary Jim Mattis on January 1, two months before his announced departure. Shanahan is a former Boeing executive and has been seen as a supporter of the Pentagon’s focus on procurement during the first two years of the Trump Presidency. It is unusual to have an acting secretary at the Defense Department, as the tradition is for the current secretary to stay on until his replacement is announced and confirmed by the Senate. Adding to the negative national security headlines, the State Department’s special envoy to defeat ISIS, Brett McGurk, also resigned. He is not a household name, but was well-respected in D.C. and his departure raises questions about other potential national security departures in the coming weeks.
February/March Likely Volatile Policy Months
The deadline on China trade is March 1, the Treasury is expected to begin emergency measures to manage the debt limit in March, and the Mueller investigation is expect to release its report in mid-to-late February. We will be monitoring these events to see how much they potentially weigh on the markets.
Legislative and regulatory agendas are subject to change at the discretion of leadership or as dictated by events.