Institute Alert

• We expect an 11th-hour congressional continuing resolution (CR) that the president will sign in time to fund the government through its fiscal year ending September 30.
• Ultimately, we believe a larger fiscal battle over raising the debt ceiling and extending the 2017 tax cuts is coming and should command greater financial market attention.

• We expect Congress to achieve both goals, but with market volatility around the likely protracted negotiations.

To avoid a government shutdown starting Saturday, March 15, both chambers of Congress must pass a fiscal 2025 budget resolution (or alternatively, a temporary, stopgap funding measure) by midnight tonight (Friday). This is the first of several key fiscal 2025 deadlines that investors will be closely monitoring.

Earlier this week, the House narrowly passed a longer-term CR to fund the U.S. government through the September 30 end of current fiscal year. To make the stopgap bill law, however, the Senate must also approve, which requires 60 votes to avoid a filibuster. This means the Senate will likely require seven or eight Democratic votes (if even one GOP senator votes against) — no small feat, given the fact that this is one of the rare opportunities Democrats have to impose leverage despite their minority position. If agreed upon, a CR through fiscal year-end might allow Congress to circumvent an across-the-board, 1% discretionary spending cut, which is a statutory requirement if no budget is in place by April 30.

On Wednesday, March 12, Senate Democratic leader Chuck Schumer dampened hopes for the longer-term CR, stating his party plans to block the GOP proposal in favor of a shorter-term CR to buy time to negotiate a longer-term bipartisan bill. However, by Thursday, Senator Schumer reversed course, conceding that he planned to vote to keep the government open, increasing the likelihood that a shutdown would be averted. A key sticking point for many lawmakers, we think, is that some Democrats at least want assurances that President Trump and the Department of Government Efficiency (DOGE) will spend the funds Congress allocates.

Government shutdowns typically have very limited effects on the economy and financial markets. Brief shutdowns in 1995, 1996, and 2013 had small and fleeting financial market impacts. The December 2018 – January 2019 shutdown was longer but had similarly transient economic impact. Some investors will remember an equity market selloff during this time, but equity prices were already weak heading into the shutdown, for reasons we believe had more to do with weak earnings and Federal Reserve (Fed) interest-rate increases that raised borrowing costs. In fact, the S&P 500 Index bottomed in late December of 2018 and rallied with the first Fed rate cut in early January.

To reiterate, we do not expect a shutdown, but, if one were to occur, essential services, like the distribution of Social Security checks, Medicare benefits, air-traffic control, and most defense spending would continue. Likewise, the Treasury should still pay interest and principal on time, given the priority assigned to those payments during past government closures.

We believe the main focus of the CR at this point is the larger fiscal policy goals in 2025. A larger process, already underway in Congress, seeks to raise the debt ceiling and to focus on tax cuts. Some of those proposed tax cuts would be new. Some others would extend provisions, due to expire at the end of 2025, of the Tax Cuts and Jobs Act of 2017. The process, known as the reconciliation procedure, allows Congress to approve a budget that includes these measures by simple majority vote in both chambers (avoiding the legislative block of a Senate filibuster). However, extending the tax cuts would require a series of additional expense cuts. The longer the tax-cut extension that Congress seeks, the larger the required expense cuts.

Timing matters. The tension between those members of Congress who want more tax cuts and other members who want to maintain spending could take time to resolve. Meanwhile, the Treasury is running down its cash reserves and will need a new debt ceiling, probably by August. We expect a noisy spring and summer of negotiations, and any last-minute drama could again tip markets into volatility, particularly fixed-income markets.

Behind the scenes, the House and Senate have been operating on two tracks for a budget resolution:

• The Senate’s two-step approach focuses on one reconciliation bill to fund the president’s border, energy, and defense policies. Then a subsequent reconciliation bill would address the more contentious tax and spending cuts, along with an increase in the debt ceiling.
• The House has embraced President Trump’s “one big, beautiful bill” approach calling for a single budget resolution and reconciliation process to avoid the risk of losing a narrow, fractious, three-seat GOP majority in a more drawn-out budget debate.

The House already (narrowly) passed its budget resolution on February 25, which would allow a temporary extension of the 2017 tax cuts, funded in part by reducing spending on Medicaid, food stamps, and a few other items. Talks still could stall, however, over deeper tax and spending cuts demanded by conservative GOP senators, whose support is needed for a reconciliation bill to enact legislation.

In our view, the odds currently favor final legislation closer to the House version of a single bill, for fear of losing votes from the GOP’s ultra-thin majority in that chamber. An alternative could be some new tax cuts, plus a shorter extension of the 2017 tax cuts, in order to avoid deeper cuts in government spending. A last resort would be the Senate’s two-track approach already supported by both chambers of Congress and the Trump administration.

Ultimately, we believe a larger fiscal battle over raising the debt ceiling and extending the 2017 tax cuts is coming and should command greater financial market attention. We expect Congress to achieve both goals, but protracted negotiations portend market volatility, especially in fixed income of longer maturities.¹

¹ For complete details on our recent guidance changes, please see our Institute Alert, “Adjusting fixed-income and equity positions,” March 11, 2025.

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