No free lunch
Congressional game of chicken continues with government shutdown.
Bottom line
The federal government shutdown has now dragged on for 17 days, with no end in sight. Senate Republicans and Democrats held their tenth unsuccessful vote yesterday to pass a clean Continuing Resolution (CR) to extend government funding until November 21, when the final details for a full budget could be approved. While Republicans hold a 53-47 Senate majority, they need a supermajority of 60 votes to pass the resolution; only three Democrats have crossed over to consistently vote with the Republicans. The House of Representatives passed this legislation last month. Senators left Washington and returned home last night, ostensibly to gauge feedback from their constituents. If voter frustration boils over, perhaps enough moderate Democrats will switch their votes.
What are the issues? Many voters want lower taxes, more services and a balanced federal budget. Those objectives are contradictory, of course, as successful governing requires communication, compromise and shared sacrifice. So, members of Congress are staking positions they believe will appeal to their bases, with a jaundiced eye focused on the 2026 midterm elections. Last November’s election results provided Republicans with a mandate on key issues such as defense, immigration, crime, economic growth and inflation, among other issues. Amid the government shutdown, the Democrats have coalesced around reversing President Trump’s DOGE-related health care and social policy budget cuts.
Federal debt and deficit The federal debt is now approaching $37.9 trillion, on which we spent nearly $1 trillion servicing last fiscal year. The Congressional Budget Office estimates that, without a course correction, the federal debt will exceed $57 trillion in a decade, and annual debt service will approach $1.7 trillion. The total debt-to-GDP ratio is now at 126%, more than double where it was when President George W. Bush left office with $10 trillion in federal debt in 2008. So, over the terms of last three presidents spanning 17 years, it has nearly quadrupled.
Treasury Secretary Scott Bessent says this trajectory and the pace of rapid debt accumulation is unsustainable. His “3-3-3” plan endeavors to gradually reduce the federal budget deficit from 7% at the end of last year to 3% by the end of 2028. He has already managed to reduce the deficit to 6.4% in this year’s second quarter, by growing the economy faster at 3.8% and by slowing the growth in spending.
Back to the future The key issue at present appears to be Trump’s desire to reset the pandemic-related benefit increases for the Affordable Care Act (ACA), Medicaid and the Supplemental Nutrition Assistance Program (SNAP) food-stamp benefits back to pre-pandemic level. He wants to allow the enhanced ACA subsidies to expire at the end of this year, as designed, and introduce work requirements and more frequent eligibility checks for able-bodied, childless adults for Medicaid and SNAP. Democrats, on the other hand, want to extend and make permanent the pre-Covid expansion, and include undocumented immigrants in the programs, at an estimated cost of about $1.5 trillion.
ACA enrollment now totals 24 million people (about 7% of the US population of 342 million); SNAP benefits are extended to 41.7 million people (12%); and 70.5 million people are on Medicaid (21%). Since Congress introduced extra funding in 2021, ACA enrollment has doubled. The federal poverty level is set at $15,650 for an individual and $32,150 for a family of four. Based upon the latest available IRS data from 2022, half the US population earned annual income of $50,000 or less.
Where do we draw the line? So, a reasonable compromise on this issue could be to extend ACA benefits to those who earn $50,000 and under per year, or 155% of the federal poverty level (based on 2022 income data, which should be indexed accordingly). That would extend health care benefits to the bottom half of Americans and effectively cut the program in half, back to pre-Covid levels. At present, ACA benefit increases are extended to those families making as much as 400% of the federal poverty line, or about $129,000 in annual income, which places them in the top 20% of America. Republicans argue that these families can afford to purchase their own health insurance without subsidies, or they can apply for affordable benefits at work. The unemployment rate is low, reaching 4.3% in August 2025. (It is likely little changed in September but the government shutdown has prevented the release of that data.)
Otherwise, the ACA program as currently constructed with the generous subsidies represents a massive redistribution of wealth — from corporate America and the top 20% of America to the bottom 80% — rather than a program that offers a helping hand to the bottom half of Americans.
Political gamesmanship Why are Congressional Democrats dug in on extending the pre-pandemic subsidies? Perhaps we’re overly cynical, but we’d note that Senate minority leader Chuck Schumer (D-NY) may be concerned about a rumored primary challenge from Rep. Alexandria Ocasio-Cortez (D-NY). House minority leader Rep. Hakeem Jefferies (D-NY) knows that the party out of power typically gains 20 seats or more in the next midterm election. Because Republicans hold the smallest House majority at only five seats in a century, Democrats may well regain majority control of the House in November 2026, which could position Jefferies to replace Rep. Mike Johnson (R-LA) as the next speaker of the House. So, these leaders may be attempting to demonstrate their party bona fides to their Democratic base and their Congressional colleagues.
We’ve long believed that implementing 12-year Congressional term limits is an effective strategy to prevent such behavior, potentially shifting a politician’s focus to achieving policy wins for their constituency, rather than extending their own career in Washington. Unfortunately, that’s not likely to happen anytime soon, if ever.
Are we there yet? The shutdown might very well persist throughout the rest of October, as insiders believe that the off-year election day on November 4 might be the next key date. Political strategists are bracing for results from the controversial New York City mayoral race and the tight governor races in New Jersey and Virginia. This could become the longest shutdown in US history. We experienced a 34-day partial federal government shutdown in 2018-19 under Trump and a 16-day full shutdown in 2013 under President Obama. The Congressional Budget Office estimates that fourth quarter GDP could be hurt by perhaps 0.5%, depending upon the duration of this current government shutdown.
Data vacuum In the absence of any meaningful government data, what’s the Federal Reserve to do? Tie goes to the runner, in our view, so we expect it to cut interest rates again by a quarter point on October 29 and December 10, followed by three more in 2026, which would take the fed funds rate down to 3% before year-end. Embedded in our forecast is that we still expect a more dovish leadership transition, after Fed Chair Jerome Powell’s term expires in May 2026.
Read more about our views and positioning at Capital Markets.