October in Washington was certainly one for the history books. In the waning hours of September 30, Congress crafted a last-minute deal to fund government operations for six weeks, averting a government shutdown that would have begun on October 1. And that's when the chaos really started.
On October 3, House Speaker Kevin McCarthy (R-Calif.) became the first speaker to be ousted from the position after a handful of his Republican colleagues forced a vote on his leadership, in part because he did not push for spending cuts as part of the government shutdown deal. What followed were 22 days of paralysis as House Republicans struggled to pick a new speaker, with three Republican nominees for the post failing to win the minimum 217 votes needed. While this played out, the House was effectively closed for business, with lawmakers unable to debate the issues, vote on legislation, or hold hearings.
The House confirmed Rep. Mike Johnson (R-La.) as the new speaker on October 25. Johnson, a low-profile conservative in his fourth term representing the northwestern part of Louisiana, was no one's first choice, but he emerged as the consensus choice of Republicans to get the House functioning again.
Now that the spotlight is on Speaker Johnson, he's been immediately thrust into a series of thorny issues, including a $106 billion emergency spending proposal from the White House for military aid to Ukraine and Israel, humanitarian aid for civilian victims of those and other conflicts, money for border security, and more.
Congress averts government shutdown...again
Congress has once again narrowly averted a government shutdown, passing a stopgap funding measure that ensures the government will remain open until early 2024. But the bill likely increases the risk of a government shutdown in February.
The legislation, crafted by the new speaker of the House, Rep. Mike Johnson (R-La.), extends government funding at current levels in an unusual two-tiered manner. Several agencies, representing about 20% of government spending, are funded through January 19. The rest of the government is funded through February 2. That means that Congress will have a pair of deadlines looming in the new year.
The package cleared the Senate on an 87-11 vote late on the evening of November 15. That followed a 336-95 vote in the House of Representatives on November 14. President Joe Biden plans to sign the bill into law prior to the November 17 deadline. The final package did not contain any controversial policy provisions or spending cuts, which led most Democrats to support the proposal. More than 90 House Republicans, frustrated by the lack of spending cuts, voted against it.
Government shutdowns have not historically been big market movers. In fact, the S&P 500 has gone up during the last five government shutdowns. But an extended shutdown could see more than 800,000 federal workers furloughed and many government services stopped or curtailed, which could have some impact on the broader economy.
The battle over government spending this year is part of a growing debate on Capitol Hill over the federal deficit and the national debt. Rising interest rates mean that the cost of servicing the nation's $33 trillion debt is increasing. Interest payments rose to $659 billion in fiscal year 2023—an 87% increase in just two years. Projections indicate that in three years, interest payments on the debt will become the federal government’s second-largest expenditure, behind only Social Security. Expect reducing the federal deficit (now nearly $2 trillion) and the national debt to be a major theme in the 2024 election and beyond.
Of course, the focus in 2024 will be on the presidential election and the Congressional elections that will determine control of the House and Senate. Given the looming election and the bitter divisions between the parties on Capitol Hill, it's hard to imagine much substantive legislation moving next year, though some issues could see bipartisan cooperation. Two areas to watch are artificial intelligence and cryptocurrency.
On October 30, President Biden issued a 111-page executive order on AI, which outlines the administration's priorities, calls upon more than a dozen agencies to develop standards and safeguards and creates a cross-government council on AI to coordinate activities. The president called AI "the most consequential technology of our time" and said the administration would focus on "safety, security, trust, and openness" by balancing innovation with guardrails. He acknowledged that Congress would have to be involved in setting those parameters.
On Capitol Hill, Senate Majority Leader Chuck Schumer (D-N.Y.) has been leading an effort to educate senators about AI, convening a series of six (to date) listening sessions with tech executives, academics, civil rights advocates, and other experts that have attracted broad bipartisan participation. But his hopes for producing consensus legislation on AI by the end of the year appear to have been pushed back, given the complexity of the issues involved. The first half of 2024 will be critical to see whether Congress can find common ground to put a regulatory framework in place before the end of the year for the fast-moving AI sector.
Cryptocurrency is another area that has drawn bipartisan interest as lawmakers seek to create a better regulatory apparatus that includes investor protections. Despite numerous hearings this year on the topic, consensus has remained elusive. House Republicans are expected to move forward by the end of the year with a bill to grant broader regulatory authority to the Commodity Futures Trading Commission to regulate the crypto space, but it's unclear whether that approach will gain traction in the Senate.
Next year's election will also go a long way toward determining what the outlook will be for a high-profile debate over tax policy in 2025. The 2017 tax cuts, which included lower individual income tax rates, a higher standard deduction, a higher exemption amount for the estate tax, and numerous other provisions, are set to expire at the end of 2025. This will be perhaps the most consequential and complicated issue for the new Congress.
DOL Fiduciary Rule: Here we go again
On October 31, the Department of Labor unveiled its long-awaited proposal to redefine who is a fiduciary in the retirement savings context, which the administration has rebranded the "Retirement Security Rule." The rule is the latest iteration in a nearly 15-year effort by various administrations to update the fiduciary standard. The Obama administration's 2016 rule went briefly into effect before being invalidated by the courts in 2018. The current administration has issued "frequently asked questions" to try to clarify its vision, but even those have seen setbacks when tested in the courts.
The new proposal changes the test for determining whether an individual is a fiduciary and would make one-time rollover advice fall under the fiduciary definition, as well as recommendations involving annuities. The administration framed the proposal under a broader effort to reduce "junk fees" in various consumer relationships, calling retirement advice that is not in a client's best interest a "hidden cost to their lifetime savings."
The proposal will now head to a 60-day public comment period. Given the controversy that has surrounded this issue for more than a decade, expect the details of the proposal to be carefully reviewed and vigorously debated in the months ahead.
Also on the regulatory front, we continue to await final action on several proposals at the SEC with a direct impact on investment advisors. The agency is said to be close to finalizing proposed regulations for RIAs on cybersecurity and due diligence of third-party vendors. Broader proposals on equity market structure and climate risk are also reportedly in the queue for final decisions late this year or early in 2024. Significant revisions to the custody rule are also awaiting final action. And the comment period closed just last month on a controversial SEC proposal to combat conflicts of interest when using predictive data analytics to guide the advice provided to investors. That proposal's sweeping definition of covered technologies has the potential to radically reshape how advisors interact with clients.