Midterm Elections Signal More Washington Gridlock
Republicans appeared poised to capture a narrow majority in the House of Representatives early Wednesday, while the Senate remained too close to call as vote counting continued in several key states. Markets opened slightly lower on Wednesday as investors processed the mixed messages sent by voters.
Republicans had been widely favored for months to capture the House majority, but the final margin appeared likely to fall short of expectations. In the Senate, two key states—Arizona and Nevada—may not be called for several days. And in Georgia, the top two candidates appeared to be headed for a run-off election that will be held on December 6th. That race could determine which party emerges with the Senate majority.
While results won't be finalized for some time, it is clear that we will have two more years of an extremely narrowly divided Congress. That's not a recipe for a lot of big legislative initiatives in the year ahead. But there will be some key issues to watch in 2023.
Looming debt ceiling fight could rattle markets
Topping the list of potentially market-moving issues is the coming fight over the debt ceiling, which is the cap imposed by Congress on the amount of debt the United States can accumulate. Congress will need to raise the debt limit sometime in early to mid-2023 or risk an unprecedented U.S. default. Raising the debt limit has become a huge political challenge over the last decade, and it could be particularly tricky if Republicans have the majority in the House but Democrats retain a narrow majority in the Senate.
Markets tend to get rattled by uncertainty over when and whether Congress will raise the debt ceiling. Many analysts have drawn comparisons to the 2011 debt ceiling debate, in which the U.S. came within days of defaulting. Market volatility spiked and Standard & Poor's downgraded U.S. debt for the first time in the nation's history. A similar scenario could play out in 2023.
On broader economic issues, the two parties have very different visions on issues like government spending and steps to combat inflation, so compromise is unlikely. That will mean that responsibility for fighting inflation will continue to fall to the Federal Reserve, which is expected to raise interest rates further at its meeting next month before easing the frantic pace of rate hikes in early 2023.
On other issues, Congress is also likely to struggle to find areas for bipartisan compromise next year. Regulation of big tech companies is a one possible area, as both parties have expressed concerns about the market domination of a small number of technology companies. But the two parties have found it difficult so far to agree on a path forward.
Cryptocurrency regulation is another area that has attracted bipartisan support and could see action in 2023. Lawmakers would like to create a better regulatory framework, including robust investor protections, for digital currencies.
Still issues to deal with in 2022
While there is considerable interest in looking ahead at what the new Congress will look like in 2023, the current Congress still has unfinished business. Lawmakers will return to Washington for the "lame duck" session on November 14th, which is expected to last until mid-December. The biggest issue on the agenda will be reaching a compromise to keep government operations funded. A temporary agreement to keep the federal government open and operating expires on December 16th. Congress will need to pass an "omnibus" appropriations bill to fund all government operations for the remainder of the fiscal year (which runs until September 30th, 2023) or, more likely, pass another temporary extension until early 2023 to avert a government shutdown and allow the new Congress to wrestle with the funding issue in the new year.
We are also watching a bipartisan retirement savings bill that has strong bipartisan support and could be approved by both the House and Senate before the end of the year. The bill would raise the age at which retirees have to begin taking required minimum distributions from their retirement accounts to as high as 75 from the current 72. Details on exactly when and how much the required minimum distribution age will increase are still being negotiated on Capitol Hill. The legislation would also increase "catch-up" contributions, allowing individuals approaching retirement age to save more. And the bill would boost employer-sponsored plans, such as 401(k)s, by making it easier for employers to start and strengthen plans. While the legislation's details are still being finalized, key lawmakers on both sides of the aisle are optimistic the bill can pass before the end of the year.
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