PIMCO – Boehner’s Retirement: Risks Shift To Later This Fall

Boehner’s Retirement: Risks Shift To Later This Fall by Libby Cantrill, PIMCO

The news of House Speaker John Boehner’s retirement from Congress was no doubt a surprise, but more for its timing than its ultimate outcome. For the past two years, it has been speculated that Boehner would retire at some point, but conventional wisdom was that he would do so at the end of this session of Congress (and not in the midst of it).

Regardless of the political machinations, what does this mean for investors? The short answer is that it actually decreases policy risk in the very short term – odds of a government shutdown have gone down. At the same time, however, Boehner’s announcement increases the chances of policy risk later this fall, when his successor will have to lead the House to raise the debt ceiling and pass another government funding bill.

Why have odds of an immediate shutdown gone down? Congress needs to pass a funding bill by September 30 to avoid a government shutdown. Boehner will still be in office then, and it is he who controls which bills will be considered on the House floor. His impending retirement gives him the political flexibility within his party to do what he has done so many times before with controversial legislation – bring a clean funding bill (devoid of policy riders, such as the provision to defund Planned Parenthood) to the House floor and pass it with a majority of Democrats and a minority of Republicans. This is the same playbook he has used to address almost every other significant fiscal deadline.

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While the chances of a shutdown are actually lower now, the likelihood of a future policy mistake this fall is arguably higher. Boehner’s successor will be forced to navigate a fractured caucus with an emboldened Tea Party cohort as Congress faces two important upcoming fiscal deadlines: one, to raise the debt ceiling (likely in November or December) and two, to fund the government (likely in December). How this plays out will in part be predicated on who succeeds Boehner and how emboldened the right flank of the House Republicans feels. These fiscal deadlines look likely to coincide with the Federal Reserve’s mid-December meeting, when the Fed will once again convene to consider whether to raise the policy rate.

So bottom line? The risk of an imminent government shutdown has arguably decreased – expect a “clean” short-term funding bill to pass next week and the government to stay open. But policy uncertainty has undoubtedly increased going into the fall, and the chances of a policy mistake around the debt ceiling or future government funding have increased significantly.

All the while, the Federal Reserve will be watching what is happening on the other end of the National Mall as it considers its next steps.