Is There a Second Shutdown on the Horizon?

Shutdown 2.0

Though US legislators did agree to reopen the Federal government after a three-day shutdown last week, nothing of any long-term legislative consequence was accomplished. In fact, the sticking point for any agreement in Washington is DACA, and in that regard, the battle is yet to be fought. If recent negotiations are any indication, DACA will be only a part of the fight that the White House wants to have regarding immigration policy, the wall on the southern border and chain migration.

Senate Democrats and Republicans did manage to cobble together a 6-year extension of the Child’s Health Insurance Program (CHIP) last week, but left the main sticking point of Deferred Action for Child Immigrants (DACA) unresolved. In an effort to get the shutdown behind them, Senate Majority Leader Republican, Mitch McConnell, agreed to hold a vote on DACA in coming weeks if negotiations don’t move forward in the meantime. From the looks of the current deadlock and given the efforts underway by the administration to broaden its objectives for the negotiations, there is a good chance we will see another Federal Government shutdown in coming weeks. If in fact, one does materialize and if it manages to last longer than the one that just occurred, markets will take a breather.

FOMC 2018

The FOMC holds its first meeting of 2018 this week and the last one chaired by Janet Yellen. The widely held consensus is that the Federal Reserve will leave rates unchanged. Themes that fuel a move on rates include current levels of inflation, anticipated inflationary pressure within the economy, economic activity and the global political-economic landscape. Given that none of these themes suggest any urgency, in regards to tightening, most on the street are expecting a rather tame FOMC Announcement on Wednesday at 2:00 PM EST. Investment managers are expecting three rate hikes this year and, given the economic data we have received in recent weeks, I don’t see any reason for that to change. For example, last Friday’s release of initial Q4 GDP revealed that though the US economy expanded at a healthy rate of 2.6%, it was well below Bloomberg consensus of 2.9%. It has not yet achieved the escape velocity of 3% or higher. GDP expansion at that rate would likely trigger a more aggressive posture on the part of the Fed. That may change by the time the FOMC meets again on March 20.

The effects of the tax reform legislation passed in December of 2017 have not been reflected in the economic data released to date this year. As a result of the tax reform legislation, Q1 of 2018 should begin to reflect continued earnings growth, increased in consumer spending, construction spending, wage growth, continued employment gains and ultimately a higher level of GDP expansion. As it stands, the odds of a move by the Fed in March are better than 50/50.

Kenny’s Commentary subscribers receive the note in their inbox Monday’s before the open Subscribe

Flickr photo: mroczknj