Edgy Investors Waiting to See How Policies Unfold

MIKE TOWNSEND: The ambitions of Donald Trump and Republican leaders on Capitol Hill are sky high. They have outlined a massive policy agenda, including sweeping immigration reforms, tougher border security, wide-ranging tariffs on imports, a massive tax bill, major cuts to government spending, raising the debt ceiling, enacting new energy policies, revamping health care, and reducing regulation—all of which could have a significant impact on the economy, the markets, and investors. 

Welcome to WashingtonWise, a podcast for investors from Charles Schwab. I'm your host, Mike Townsend, and on this show, our goal is to cut through the noise and confusion of the nation's capital and help investors figure out what's really worth paying attention to.  

On today's episode, I'm going to focus on setting the table for what is shaping up to be an incredibly busy year for policies that will directly affect every investor. Upcoming guests on this podcast will include Schwab experts who specialize in specific segments of the markets—from bonds to equities to global investing—and they're going to help me dive into the implications of all these policies on different types of investments. But it's important first to lay the groundwork for what is on the horizon in a dramatically different Washington.

If you listen to WashingtonWise regularly, you have often heard me say that nothing happens fast in the nation's capital, and nothing happens without a fight, even if it's an internal fight among members of just one party. And nothing ever ends up in the same place as it was when it started. Right now, the big questions that seem to be on everyone's mind are "Just how much of that packed list of initiatives that Trump has put forward is realistic?" and "What is the likely timetable for getting things done?"

So let's start with some of the key players in this drama. On Capitol Hill, the 119th Congress was sworn in on January 3, with Republicans now having majorities in both chambers for the first time since 2018. But the word "majority" is something of a relative term in 2025.

In the House of Representatives, the margin was 219 Republicans and 215 Democrats on swearing-in day, with one vacancy. That vacancy is courtesy of the former Republican Congressman from Florida Matt Gaetz, who resigned from Congress in November after being nominated by Trump as his attorney general. Of course, Gaetz's nomination lasted about a week before it was clear that he would not be able to be confirmed by the Senate, and he withdrew his name. But he did not return to Congress.

The already razor-thin margin in the House, however, is about to get even narrower. That's because Trump has nominated two sitting House Republicans for senior positions in his administration—Representative Mike Waltz of Florida as national security advisor and Representative Elise Stefanik of New York as ambassador to the United Nations. Both are expected to be confirmed later this month, and both will then resign from Congress. That will leave Republicans with a one-seat margin of 217-215, with three vacancies. That margin will persist until April, when special elections are held to fill the vacancies. If any single Republican votes against the party line, and all Democrats vote together, that would produce a 216-216 tie on that vote—and ties lose in the House of Representatives. So to pass anything at all over the next couple of months, Republicans in the House will have to show uncharacteristic unity and discipline.

As we've seen over the past couple of years, keeping all House Republicans on the same page on just about anything has proven to be all but impossible. It started in early 2023, when it took four days and 15 votes to elect a speaker of the House. Months later, that speaker, Kevin McCarthy, had been ousted from the job by a handful of his colleagues via a rarely used "motion to vacate the chair." The subsequent chaos paralyzed the House for three weeks as multiple candidates failed before the House finally elected Mike Johnson from Louisiana as speaker. 

That lack of unity raised its head again in December, when Republicans failed to unite around a plan to fund government operations through the end of September and raise the debt ceiling. We've seen it again and again—House Republicans fighting among themselves.

This year, the speaker election still was not without drama. On the first ballot, six Republicans declined to vote, and three Republicans voted for someone else. That left Johnson shy of the necessary majority to be elected. The vote was held open for an hour while backroom negotiations went on, including calls from Trump to some of the renegades. Those calls proved to be the tipping point, as eventually the six Republicans who hadn't voted cast their ballots for Johnson, and two of three who had voted for someone else changed their votes. That gave Johnson the majority and the speakership, avoiding an embarrassing repeat of the multiple-vote saga of two years earlier. 

But it's a sign of the power of a tiny handful of House Republicans to create chaos. To me, the House is going to be the most important thing to watch over the first 100 days of the Trump presidency. Can they come together behind Trump's agenda when every House Republican essentially has veto power? We'll see.

In the Senate there will be 53 Republicans and 47 Democrats, including the two independent senators, Bernie Sanders of Vermont and Angus King of Maine, both of whom caucus with the Democrats. But even in the Senate where the Republican majority is stronger, things are still not totally straightforward. There are a handful of independent-minded Republican senators who are not always aligned with their colleagues.

Confirmations of Trump's Cabinet nominees will be the first order of business for the Senate. In fact, this week Senate committees will hold confirmation hearings with 13 of Trump's nominees, the first step in the confirmation process. It's the Senate's unique responsibility to provide the constitutional "advice and consent" on the president's nominees for more than 1,200 positions in the federal government. Cabinet secretaries and Supreme Court justices are of course the highest-profile appointments on that list, but every federal agency has numerous deputy secretaries and undersecretaries and assistant secretaries that also require confirmation. The reality is that there is literally not enough time for the Senate to approve all of them, which is why at any given moment there are hundreds of high-ranking officials across the government with the word "acting" in their title. 

It's not unusual for confirmations hearings to begin in the Senate before the president takes the oath of office. And this year's hearings began on January 14. The Senate tries to process key nominations as quickly as possible so that some of the 15 Cabinet officials heading departments can be sworn in on January 20 or as soon thereafter as possible, part of ensuring a smooth transition of government. 

But it rarely works this way in practice. Senate confirmations on the first day of the last three administrations stood at six for Barack Obama's presidency, two for Trump's first term, and just one for Joe Biden's presidency. 

If we cast the lens a bit wider, it took 61 days for the Senate to confirm all 15 of Joe Biden's core Cabinet nominees. But it took 97 days to confirm Donald Trump's nominees in 2017 and 98 days to confirm Barack Obama's after he took office in 2009. You have to go back to George W. Bush in 2001 to see real efficiency—it took the Senate just 12 days after he was inaugurated to confirm all Cabinet secretaries in his administration. 

Much of the media attention in the coming days will be on some of the more controversial nominees, like Pete Hegseth for Defense Secretary and Robert F. Kennedy, Jr., for Secretary of Health and Human Services. There will be considerable scrutiny on how they fare in what will undoubtedly be bruising confirmation battles. 

For the markets, however, I think it is particularly notable that Trump's choices for key financial roles in his administration have been widely praised. Scott Bessent, a hedge fund executive, is considered to be on a glide path to a quick confirmation as Treasury Secretary, where he would lead the administration's efforts on taxes, tariffs, and deficit reduction. He has worked on Wall Street since the 1980s and has reportedly been impressive in his introductory meetings with senators from both sides of the aisle. 

Howard Lutnick, the long-time CEO of investment firm Cantor Fitzgerald, is Trump's choice for Commerce Secretary. He, too, seems likely to be confirmed to head a department that has increased in importance in recent years due to its role in overseeing the race between the United States and China on key technologies like semiconductors and artificial intelligence. 

And Trump's choice to oversee the capital markets as chair of the SEC is Paul Atkins, who served for six years as a commissioner at the SEC during the presidency of George W. Bush and since then has run a well-respected financial consulting firm in Washington that he founded in 2008. 

It's clear from these choices that the place Trump most wants to avoid controversy is in the economy and the markets. He is keenly aware that, despite his campaign rhetoric, he is inheriting an economy that is in strong shape, with inflation down to about 3% and unemployment near its all-time low. And the markets are strong as well, with the S&P 500^® rallying more than 23% in the final year of Joe Biden's presidency. Trump cares a lot about market performance and key economic metrics—and his choices for these positions reflects that he is less interested in rocking the boat here than he is in other areas of the government.

Personnel matters are also in the headlines at the Federal Reserve, where last week the vice chair for supervision, Michael Barr, announced that he would step down from that position on February 28, or as soon as his successor is confirmed to the vice chair slot. That's about 17 months before his term was supposed to end. But interestingly, Barr is not resigning as a regular Fed governor. His term as a governor does not expire until 2032. What this means is that there is no vacancy that Trump will have to fill at the seven-member Fed Board of Governors. Instead, he'll have to promote a current governor to that vice chair of supervision seat. It's widely expected that he will tap Michelle Bowman, whom he nominated as a Fed governor in 2018, to move up to the vice chair position. 

The vice chair for supervision, in addition to having a regular vote on monetary policy decisions, is responsible for leading the Fed's regulatory oversight of large banks. Michael Barr, in that role, had championed an aggressive series of rule proposals that would have required banks with more than $100 billion in assets to hold more capital in reserve and to issue and maintain minimum amounts of long-term debt. He proposed those rules in the wake of the 2023 collapse of Silicon Valley Bank, the second-largest bank failure in history. But the draft rules were aggressively opposed as too draconian by the banking industry and by Republican lawmakers. Eventually, the Fed announced plans to scale back the requirements, but with the change in administration, the rules are in limbo and are likely to be reworked entirely. 

Many in Trump's circle had called for him to fire Barr. It's not clear whether the president has the authority to fire a sitting Fed governor, but Barr realized that it would require a messy and lengthy legal fight to keep his job, which would be a major distraction for the Fed. He chose to step aside from the vice chair role rather than launch that fight.

That's quite a lot of information about personnel, but as the saying goes, "personnel is policy." Having the right people in key positions will determine a lot about how Trump's policy agenda unfolds. And it's clear from his choices that he is willing to upset the apple cart in some areas and not so much in others. 

Once the people are in place, the focus will turn to policy. As I discussed on the last episode, the policy agenda in 2025 is absolutely enormous. Tariffs. Border policy. Immigration. Taxes. Debt ceiling. Deregulation. Energy policy. And much more. The question that Trump and Republicans on Capitol Hill are wrestling with right now is what is the best way to get it all done.

And here I want to take the time to talk about a term you are going to hear over and over in 2025—budget reconciliation. It's the key to understanding how this ambitious policy agenda could become reality.

Budget reconciliation is a complicated parliamentary process that is used when one party has full control of Washington. It allows for expedited consideration of budget-related legislation, with limited time for debate and restrictions on amendments. Most importantly, it can be passed with a simple majority in both the House and the Senate—it cannot be filibustered in the Senate, and it does not require a 60-vote supermajority there.

The process was created by a law passed in 1974, but it wasn't used for the first time until 1980. Since then, it's been used 23 times. It's the mechanism Republicans used it in 2017 to pass the Tax Cuts and Jobs Act, the sweeping tax-cut bill that was a hallmark of Trump's first presidency. Democrats used it in 2021 to pass the American Rescue Plan, the $1.9 trillion post-COVID economic stimulus package. And they used it again in 2022 to approve the Inflation Reduction Act, which lowered some prescription drug prices and boosted green energy, among other provisions.

The first step of the process is that both chambers need to pass a budget resolution. This is kind of like a framework for the budget—it outlines the aggregate spending and revenue amounts and then includes instructions about specific budget goals. But it doesn't include the details. The details are filled in by the key committees of jurisdiction, which determine the specific numbers for spending and revenue and the policies that will achieve those goals. The instructions can cover only three specific purposes. First, to make changes to the debt limit. We'll come back to that one in a minute. Second, to make changes in revenues for the government, via taxes, fees, assessments, and other mechanisms that directly affect how much money comes into the government's coffers. And third, to make changes in spending. 

In the Senate, there's something called the Byrd Rule, named after former Democratic Senator Robert Byrd of West Virginia. The rule requires everything in a budget reconciliation package to have a direct budgetary consequence—it's designed to ensure that the legislation does not include extraneous policy changes that are not directly related to the federal budget. Any senator can raise a point of order about a particular provision, asserting that it does not have a budget impact and therefore must be removed. 

And this is where it gets interesting. In the Senate there's a parliamentarian who is the official advisor to the Senate on the interpretation of the rules and on parliamentary procedures. Elizabeth MacDonough has served in the role since 2012—she's just the sixth person to serve as parliamentarian since the position was created in 1935. She was appointed by then-Senate Majority Leader Harry Reid, a Democrat, and has stayed in her role despite multiple changes as to which party is in the majority. While she can be fired, it would be highly unusual if that were to happen.

The parliamentarian plays a crucial role in the budget reconciliation process. It will be her job to determine whether any provision is relevant or not. These are extremely important decisions made by a non-member of the Senate. 

The full Senate can only reverse the parliamentarian's decision with a three-fifths majority vote, or 60 votes. Since Republicans will have only 53 seats in the Senate in 2025, it will be virtually impossible to overrule the parliamentarian. So the key takeaway here is that every single provision in a budget reconciliation package must have a direct and measurable effect on the federal budget. And the parliamentarian makes that call.

Normally, Congress can only pass one budget resolution per year, outlining the upcoming fiscal year's finances. But Congress never passed a budget resolution in 2024 for the fiscal year that began last October 1. Since the fiscal year is still going on, Congress could choose to pass a budget resolution for the current year and a second resolution for next year—in other words, Republicans could, if they choose, have two bites at the budget reconciliation apple this year.

And that decision is proving to be a very tricky one already. House Republican leaders want to craft a single gigantic bill that includes all of the major policy initiatives. Speaker Mike Johnson is advocating for this approach because he is aware of just how narrow his margins are in the House, and he thinks that, by including everything in one big bill, there will be something in it that pleases everyone, making it more difficult for his colleagues to vote against it. He worries that trying to pass two reconciliation bills will just be too difficult with his fractious coalition in the House.

But many Republican senators favor the two-bill strategy. They argue that the one gigantic bill will take months of negotiations—and they are probably right about that. They are suggesting that Congress move quickly on a first bill that includes things Republicans generally agree on, like border security, immigration changes, and energy policy. That would put a win on the board early in Trump's term, likely in the first 100 days. That victory, proponents of this approach say, will build goodwill and momentum for a second bill, featuring some of the more complicated issues, like tax code changes.

Earlier this month, Trump weighed in on the debate, advocating briefly for the one-bill approach. But the next day, he said he'd support the two-bill strategy if that's what Congress wanted. The reality seems to be that he doesn't really doesn't care which strategy is employed—he just wants his policies enacted one way or the other. 

The plan for now seems to be to start with the goal of passing "one big, beautiful bill," as Speaker Johnson has said. But a bill that large and complex is likely to take six months or more to develop the details and move through the legislative process. The larger it gets, the more it runs the risk of collapsing of its own weight. 

And the longer it takes, the more frustrated with the process Trump is likely to become. Don't be surprised if what starts as a one-bill strategy turns into a two-bill strategy once it becomes clear how long a massive bill will take. 

With all of that background, here's a quick update on the state of play on four key issues that the markets, investors, and companies will be watching closely in the first months of the new administration. How these four are resolved will be critical to market performance in 2025.

The first is the looming debt ceiling debate, which was last addressed in mid-2023, when then-Speaker Kevin McCarthy struck a deal with Democrats to suspend the debt ceiling until the end of 2024. That deal infuriated many Republicans. A few months later, a handful ousted him from the speakership and ultimately chose Mike Johnson to succeed him.

Now the debt ceiling is back, at a level of more than $36 trillion. Until the debt ceiling is increased, the United States is unable to accumulate any more debt. Treasury can use cash-on-hand to pay the country's bills, and later this month will begin taking what it calls "extraordinary measures," a series of accounting steps to move money across different government accounts and ensure that the country doesn't default on its debts for a few months. But those steps are temporary and are expected to be exhausted by sometime in the middle of the year. Congress will have to raise the debt ceiling by then.

The whole topic infuriates Trump. In December, as Congress was negotiating a stopgap government funding bill, he tried to pressure lawmakers into suspending the debt ceiling until 2029—after his term as president ends. But 38 House Republicans voted against it, a sure sign of how difficult this issue will be in 2025. There are a handful of Republicans who have never voted for a debt ceiling increase—and have no intention of doing so now.

Republicans are considering including a debt ceiling increase in the massive budget reconciliation bill. But there's plenty of opposition to that approach. One reason is that the budget reconciliation rules prohibit the debt ceiling from being suspended for a particular time period. Instead, it would have to be raised to a specific number, large enough to last a couple of years or more. Republican Members of Congress would have to go on the record supporting that level of debt. And that number is likely to be well north of $40 trillion—something Democrats would eagerly remind voters about in the midterm elections. 

Some lawmakers have floated other ideas, like attaching it to a bill providing aid to victims of the devastating Los Angeles fires, which even by Washington standards seems astonishingly cynical. Republicans could try to pass a stand-alone debt ceiling increase, or they could try to attach it to the next government funding bill, which faces a March 14 deadline. But they tried that in December, and it didn't work. It's hard to believe it will work in March.

Republicans are in a very tough spot here. I've watched debt ceiling battles over more than 30 years in Washington. And whatever the approach, one thing has always remained true: Despite the rhetoric and frustration and threats, despite market volatility, when push came to shove, Congress has always, always found a way to avoid a default. 

Could this time be different? In 2025, this is one battle investors need to keep an eye on, as the path forward is less certain than any time I've seen in my career. We don't yet know the exact date when the United States will default. We just know the clock is ticking toward that date. 

The second big debate to watch is taxes. The key driver in 2025 is the fact that all of the 2017 tax cuts are set to expire at the end of the year. For individuals, that includes the lower income tax rates, the higher standard deduction, and the higher amount of assets that can be inherited without triggering the estate tax. 

Nothing is guaranteed in politics. But there are not too many things that I am more confident about than this: Congress will extend those expiring tax provisions before the end of the year. How long will the extension be? That's a trickier question. Extending them for 10 years has a huge price tag—an estimated $4.6 trillion. And that's before you add any other tax provisions to the bill. So I would not be surprised if they get extended for a shorter amount of time—perhaps five years. But no decisions have been made on that yet.

The other question is what else could be included in a tax package. During the campaign, Trump supported a number of ideas, from no tax on Social Security benefits to a corporate tax cut to making the interest paid on auto loans tax deductible, just to name a few. The one that seems to have the most traction at this early stage of the process is ending the taxation of tip income. There seems to be some growing momentum for including that in the bill. 

I'm also keeping my eye on the debate over the state and local tax deduction, better known as the SALT deduction. The deduction was capped at $10,000 as part of the 2017 tax bill—that's the one that Trump signed into law in his first term. But a group of Republicans who represent high-tax states like California, New Jersey, and New York have been furious about it ever since. With new leverage this year due to the tiny majority in the House, a group of Republicans from these states went to Florida last weekend to meet directly with Trump on the issue. While he did not agree to any specifics, he told the group to find a "fair number" for the deduction cap, which sure sounds like he'd be willing to sign a bill that lifted that cap. One thing that's being kicked around in Washington is doubling the deduction for married couples, but some of the lawmakers who feel most strongly about the SALT deduction want to raise it even more. 

Issue number three is tariffs. Raising revenue and improving the country's trade imbalance through tariffs was a cornerstone of Trump's campaign from the very beginning. He has said repeatedly that "tariff" is one of his favorite words in the English language. He has threatened across-the-board tariffs of 10 to 20% on all imports, with higher tariffs on imports from China. In recent weeks, he's escalated his rhetoric towards Canada and Mexico, promising tariffs of up to 25% on imports from our neighbors unless they do their part to secure the border. Call it a coincidence, but days after visiting Trump in Florida to discuss the tariff threat, Canadian Prime Minister Justin Trudeau announced his resignation, plunging Canada into a leadership crisis.

Markets have been eagerly anticipating the details on tariffs. Many observers are skeptical that Trump will actually place tariffs on every single import, no matter what it is, no matter where it comes from. They see this as more of a negotiating tactic, with the tariffs likely to be more nuanced and targeted. Trump, for his part, has given no signals that that's how he is thinking about it. His aides have promised "shock and awe" when it comes to tariffs.

Well, all the speculation about "will he or won't he" will be answered as executive orders roll out. For the markets, the details really matter. 

This is going to be really interesting to watch. Most economists agree that broad-based tariffs are likely to trigger a trade war, which can raise prices and slow economic growth.

And as my colleague Kevin Gordon so clearly articulated during his appearance on the final WashingtonWise podcast episode of 2024, it's important to remember that tariffs are not paid by the foreign country. They get incorporated into the price paid by U.S. companies that are importing the goods. And most companies pass those increases on to consumers in the form of higher prices. That's why most economists see universal tariffs as inflationary. 

If Trump imposes broad tariffs, and they slow economic growth and increase inflation, he'll undoubtedly course-correct. Because as I said earlier, few things are more important to Trump than maintaining a strong economy and seeing the stock market continue to rise. It's not clear that his favorite word will lead to those outcomes. Stay tuned.

Finally, the fourth big thing to watch is the Federal Reserve's monetary policy. At its last meeting in December, Fed governors cut the fed funds rate by 25 basis points, after a 50-basis-point cut in September and a 25-basis-point cut in November. But the minutes of the meeting indicated that it was a close call—and that a big factor going forward is the uncertainty around government policy in the Trump administration, particularly with regard to immigration and trade. 

The markets have heard the message. On January 13, the odds of one or zero rate cuts in 2025 were at 71%, according to CME's FedWatch tool. Just one month ago, those odds were less than 35%. 

Fed officials have been clear that one of the biggest unknowns is how public policy will affect jobs, inflation, and other economic measures in the months ahead. And that's made it likely that there will be fewer interest rate changes this year.

So what does all this mean for investors? Well, in some ways, we're all in the same position as the Fed—waiting for the details on public policies and waiting to see how consumers, companies, and the economy reacts. We need the details on tariffs, on immigration, on taxes, on the debt ceiling, and more. And the economy will need some time to digest it all. 

That argues for maintaining a well-diversified portfolio this year. There are likely to be periods of increased volatility as the markets try to sort through what's happening and what the impacts will be. Double check your risk tolerance and stay diversified, as there is uncertainty ahead. 

Schwab encourages investors not to make any sudden moves based on what they think might happen—there's just too much that can't be known. If you have concerns, reach out to your financial consultant to talk through any moves you're contemplating.

I'll be talking over the next few months with a variety of experts about how different policy decisions could affect your portfolio, so come on back every other week to get our latest perspective on these developments. 

Well, that's all for this week's episode of WashingtonWise. We'll be back with a new episode in two weeks. Collin Martin, a Schwab fixed income strategist, will join me to talk about what's happening at the Fed and how the new administration's policies will impact Fed decisions, the bond market, and your portfolio.

Take a moment now to follow the show in your listening app so you get an alert when that episode drops, and you don't miss any future episodes. And I'd be so grateful if you would leave us a rating or a review—those really help new listeners discover the show.

For important disclosures, see the show notes or schwab.com/WashingtonWise, where you can also find a transcript.

I'm Mike Townsend, and this has been WashingtonWise, a podcast for investors. Wherever you are, stay safe, stay healthy, and keep investing wisely.