From the Fed to Congress: 4 Washington Issues to Watch

In Washington, the distance is roughly 2.4 miles from the Federal Reserve Building to Capitol Hill. After the Fed announcement next week, investors may want to make a mental journey between these two buildings.

While Fed policy and “taper tantrums” defined the summer and early September,market attention is likely to shifttoward Congress for the remainder of the fall. This is because a number of issues up for debate all havethe potential to add to near-term volatility. Here is a list of the four key ones to watch:

1. Budget Battles – Much like Macbeth’s soliloquy, the coming debate over the US budget will probably represent “sound and fury, signifying nothing.” There are two separate budget issues that need to be addressed: the continuing resolution to fund the government, which expires on September 30th, and the debt ceiling,which should be hit by the end of October. My expectation is that both issues will ultimately be addressed. That said, while I don’t expectanother debt ceiling crisis, the odds of meaningful fiscal or tax reforms are low in the current political climate. In other words, I expect neither a government shutdown nor progress on the country’s longer-term fiscal issues.

2. The NextFed Chairman -This issue has the most potential to disrupt markets. The president is clearly giving serious consideration to Lawrence Summers as a potential successor to Fed Chairman Bernanke. Although we don’t believe that any ofthe short-listed candidateswould implement materially different policies, Larry Summers is more of an unknown, at least from a monetary perspective. As such, his appointment could introduce some short-term volatility to bond markets, particularly given that there is a non-trivial chance that the Senate Banking Committee or the full Senate won’t confirm his nomination.

3. Syria – GivenRussia’s recent proposal to place Syria’s chemical weapons under international supervision, it’s not clear how far the president’s request for authorization for a military strike against Syria is likely to advance in Congress. While the economic implications of an attack on Syria are muted, fears of a widening conflict would likely lead to some short-term risk aversion. If the legislation is introduced and passes, there may be some near-term stock sellingand a short-term bid for oil, although the latter would be muted if the president also authorizes a release from the Strategic Petroleum Reserve.

4. Immigration - While this issue is still contentious, the list of above has pushed it back on the legislative agenda. As such, it’s not even clearif Congress will take up the bill passed by the Senate earlier this year. While the immigration debate holds less near-term significance, comprehensive immigration reform would be supportive of long-term US growth, particularly in an environment in which changing demographics are leading to less organic growth in the labor market.

In short, there are a host of issues to be debated in Washington this fall. In aggregate, they have the potential to induce some short-term volatility, though they are unlikely to impact longer-term fundamentals and the longer-term investment landscape. As such, I would advocate maintaining allocation views and using any volatility as a potential buying opportunity.

Source: Bloomberg

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