Key Issues in Washington Overshadowed by War

MIKE TOWNSEND: The first quarter of 2026 is in the books, and for investors, it's one they probably would like to forget. Driven by investor concerns about the war in Iran, the S&P 500® finished the quarter down 4.6%, its first negative quarter since Q3 of 2022. The Dow Jones Industrial Average® declined by about 3.5%, and the Nasdaq® was down nearly 6%. The price of oil was up a whopping 76%. The closure of the Strait of Hormuz, critical to the movement of oil, gas, and fertilizer, has led to disruptions to the global supply chain. Mortgage rates, which briefly dipped below 6% earlier this year, have climbed back towards 6.5%. 

Yet even with that backdrop, there are signs of resilience in the U.S. economy. Last week's jobs report showed that employers created 178,000 jobs in March, more than economists expected. Unemployment ticked down a notch. If you're confused by all this, rest assured you are not alone. The watchword among investors these days is uncertainty.

Fed Chair Jerome Powell used the word seven times in his press conference after the March meeting at which the Fed left interest rates unchanged. Powell noted repeatedly that the outlook for the U.S. economy was uncertain due to the war in the Middle East. And Washington is overwhelmed with uncertainty as well about what the president's next move in Iran will be, about what the implications for the economy will be, about when the Fed will make its next interest rate change, and about how all of it will influence this fall's midterm elections. 

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. As we begin the second quarter, it's a good time to assess not only the fallout from the war, but also to shine a light on other issues in Washington. Issues that have been overshadowed by the war but are likely to impact the markets and investors in the weeks and months ahead. But I'll start with the war in Iran. 

There's simply no way of knowing what will come next. An agreement to end the hostilities? An increase in the volume and ferocity of U.S. bombing? The U.S. just walking away? Ground troops? It feels like almost every possibility is still on the table. President Trump has set several deadlines for a resolution of the war and then changed or ignored those deadlines. We've seen the market shoot up when investors think the war may end, then give back any gains when investors realize that the president's exit strategy isn't so clear. On Capitol Hill, among both parties, there's genuine uncertainty about what the short-term goals are, what the long-term goals are, how they might be achieved, and what even constitutes winning this war.

But there's growing concern, both in Washington and among investors, that no matter how quickly the war ends, the economic fallout is likely to last for months. Iran has effectively blocked the Strait of Hormuz, the narrow choke point through which 20% of the world's oil, 25% of liquefied natural gas, and 30% of fertilizer flows. The strait is critical to the global supply chain, with as many as 30,000 ships passing through its waters every year. But now, only a handful are able to pass through each day, leaving over 3,000 commercial ships stranded. Many analysts have been saying that the implications of the closure of the Strait of Hormuz are more dire for Asia, which relies on Middle East oil, and Europe, where liquefied natural gas is in high demand, than they are for the United States. And that may be technically true. But oil is priced globally. There's not one price for oil headed to Asia and another price for oil headed to the United States. 

Here at home, it's all about gas prices. The president said in a televised speech last week that gas prices will fall as soon as he ends the war. But that's not likely to be the case. It's been said that oil and gas prices rise like a rocket but fall like a feather. They don't come back down as quickly as they went up. The likelihood that gas prices will return to their pre-war levels soon just isn't realistic. Even if the war ended tomorrow, it will likely take months for any sense of normalcy to return. Iranian missiles have hit oil production and storage infrastructure in countries across the Middle East, which will take months and in some cases years to repair and rebuild. Shipping companies need to be confident that passage through the strait is truly safe, and the backlog of ships will take weeks to sort out. 

And oil and gas aren't just about filling the tank in your car. They go into manufacturing and transportation of just about everything we buy. That's why there's so much concern about inflation. Prices rise when it costs companies more to produce and transport goods. Gas prices can change broader spending habits as well. For many Americans, every additional dollar going into the gas tank is a dollar that's not being spent on travel, dinner out, or at a store. It's a difficult cycle to break. 

In addition, when talking about Iran, we can't ignore the human cost. Thousands have been killed in Iran and throughout the region, most of them ordinary citizens. The United States has lost 13 service members. Iran shot down an American jet late last week, leading to a tense rescue operation of one of the crew from inside Iran. More such incidents could further weaken American support for the war effort, which is already below 40%. Any commitment of U.S. ground troops would change the equation dramatically. 

Finally, there's the financial cost of the war. The president did not seek authorization or funding from Congress before starting the war, but Congress may soon have to weigh in on it. The Pentagon has asked the White House for $200 billion in supplemental funding for the war effort, a request that is expected to make its way to Congress soon. Few Democrats are likely to support that kind of number, but there are many Republicans on Capitol Hill for whom voting for a massive expenditure in support of a foreign war that many explicitly oppose getting involved in will be very difficult. Of course, both parties want to support U.S. troops in harm's way, which will make this a very tricky vote.

At the same time, on April 3, the White House unveiled its budget proposal for the fiscal year that begins on October 1. The proposal calls for a 42% increase in defense spending to a record $1.5 trillion, accompanied by a 10% cut to non-defense spending. Now, the plan doesn't get an up or down vote in Congress, because the White House budget proposal is really more of a messaging document outlining the administration's preferences and priorities. Congress is responsible each year for drafting and passing a budget, and then passing the 12 appropriations bills that allocate the specific funding to every federal agency and program for the year. But we've seen how difficult that's become. The entire government was shut down for 43 days last fall because Congress could not reach agreement on a funding plan.

And the Homeland Security shutdown is currently at 55 days and counting, the longest any federal agency has been shut down due to a funding dispute in history. In the wee hours of the morning on March 27, the Senate unanimously approved a bill that would fund all of Homeland Security with the exception of immigration enforcement functions. Senators then left town for the Easter recess. Later that day, however, the House rejected that deal, instead passing a bill that would temporarily fund all of Homeland Security through May 22. And it, too, left town for a two-week recess. Any of you listeners who remember Schoolhouse Rock and the famous "I'm just a bill sitting here on Capitol Hill" song know that the only way a bill becomes a law is if the House and Senate pass the exact same version. That has not happened. 

A few days after rejecting the Senate plan, House Speaker Mike Johnson announced that he was changing direction and that the House would support the Senate-passed bill as long as the Senate made progress on separate legislation to fund immigration enforcement for the next three years. Rank-and-file House Republicans are furious about the agreement, and there's no guarantee that it will pass when the House returns to Washington on April 14, meaning the shutdown of the Department of Homeland Security may linger on. 

But it raises the question, what even is a shutdown anymore? Last month, the president directed Homeland Security to repurpose existing funds to issue paychecks to TSA agents with the goal of alleviating the long security line wait times at airports that have frustrated travelers. And last week, he said Homeland Security would use more of those funds, which were part of a big increase in funding agreed to in last year's One Big Beautiful Bill, to pay all of the agency's 260,000 employees who have been working without a paycheck during this shutdown. If everyone is being paid, what's the incentive for Congress to strike a deal to fund the agency when it returns from the Easter break. Government shutdowns have traditionally been a tool to try to force compromises on spending, but that doesn't appear to be working anymore. 

Republicans have announced that this spring they will pursue a second budget reconciliation bill. That's the parliamentary process by which they successfully passed the One Big Beautiful Bill last summer. the process that eliminates the need to reach a 60-vote super majority in the Senate. If Republicans stick together, and that's not at all a certainty, then they can pass another bill of their priorities without working with Democrats at all.

They could fund Homeland Security, fund immigration enforcement for multiple years, perhaps include the $200 billion in funding for the war in Iran, and more. Some members want to add the Save America Act, a bill requiring a voter to show proof of citizenship, like a birth certificate or a passport, when registering to vote, and a photo ID when actually voting. It's a high priority for President Trump, but the bill has been unable to overcome a filibuster in the Senate.

It's unclear whether it would meet the difficult parliamentary standards to even be included in a budget reconciliation package. Those are among the many ideas being floated right now for what should be included in such a bill. Passing any package, large or small, through both the House and the Senate won't be easy because the Republican majorities are so narrow. In the House, Republicans can only lose one member's vote because losing two could result in a 217 to 217 tie—that means the bill is defeated. And Congressman Tom Massie, a Republican from Kentucky, has consistently voted against his party on, well, just about everything over the last year. So he's likely the one vote. Speaker Johnson would need to secure the support of every other House Republican to win the vote, which does not seem very likely. But it may be the last opportunity for Republicans to pass something significant before the midterm elections. So I'll be keeping a close eye on it.

I want to turn now to another element of uncertainty in Washington, and that's the Federal Reserve. The Fed has kept its baseline interest rate, known as the fed funds rate, unchanged at its first two meetings this year. That rate is a key benchmark of the economy, influencing interest rates on credit cards and mortgages. But it does not set those rates, just like it cannot directly force the rate on a 10-year Treasury to go up or down. Those rates are set by market conditions—by what investors demand. And when there's high uncertainty amid a war, Treasury rates tend to rise. 

The next Fed meeting is April 28 and 29, but almost no one expects any rate change then. In fact, given how much uncertainty there is in the economy right now, fed funds futures as of April 7 are projecting an 80% likelihood that there will be no rate cuts at all before the end of 2026. That, if it happens, would be enormously frustrating to the president, who has argued relentlessly for the past year that the Fed should lower interest rates dramatically, specifically targeting Chair Jerome Powell for criticism. Powell himself is set to step down as Fed chair next month, but the circumstances of his departure are about as cloudy as they could be. Let me explain what's going on and why it matters.

Jerome Powell's term as chair of the Fed Board of Governors ends on May 15. The president has nominated Kevin Warsh, who served as a Fed governor from 2006 to 2011, as the next chair. Warsh's confirmation hearing before the Senate Banking Committee has been scheduled for April 16, but it's not at all clear that he'll be confirmed before May 15. Senator Thom Tillis, a Republican from North Carolina who sits on the Senate Banking Committee, has said he will block any Fed nominee until the criminal investigation of Jerome Powell is resolved. Wait, what? There's a criminal investigation of the chairman of the Federal Reserve? Well, yes. Powell's being investigated about whether he lied to Congress last summer when answering questions about the renovation of the Fed headquarters building in Washington. President Trump has been commenting about this for more than a year, saying that the building renovation, which began during Joe Biden's presidency, is over budget and a waste of taxpayer dollars. You may remember the president toured the renovation last summer, then held an impromptu press conference in which he and Powell, both wearing hard hats, bickered about the cost of the project. It was a weird moment. But the investigation continues. A federal judge recently blocked the administration from issuing subpoenas to the Fed, saying that there was abundant evidence that the probe was not about the construction project, but rather was designed to pressure Powell into lowering interest rates. The administration is now expected to appeal that decision, a process that could take weeks or months. And that could derail attempts to confirm Kevin Warsh. Senator Tillis has said that he will block a vote on Warsh's nomination until the resolution of the Powell investigation. And that may not happen before Powell's term ends on May 15. If Warsh is not confirmed by then, Powell said he will continue to serve as chair pro tem, essentially the temporary chair, until his successor is confirmed. 

But there's one more bit of intrigue to this saga. Powell's term as chair ends on May 15, but his term as a regular Fed governor ends in 2028. Now there's only one historic precedent for a chair staying on as a governor after his term ends. And that happened in 1948. But Powell might do it because it would block the president from having the opportunity to nominate someone new to fill a vacancy. Powell was asked about this at his news conference after the March meeting. And he said that he had no intention of leaving the board until the investigation is well and truly over with transparency and finality. Then when asked whether he might stay on until the end of his term in 2028, he said that he had not decided but that he would do "what I think is best for the institution and for the people we serve." That sounds to me a lot like someone who plans to stick around for a while. 

Here's why all this matters. The president has been crystal clear that he wants significantly lower interest rates. He chose Kevin Warsh because Warsh has been clear that he would push for lower rates. But the key thing to remember is that Kevin Warsh cannot lower rates unilaterally. It's the Federal Open Markets Committee, the FOMC, that makes monetary policy decisions. And the most important word in that name is the last one—committee. There are 12 voting members. At the moment, that committee is nowhere near consensus that rates should be lower. At the March meeting, the vote was 11 to one in favor of holding the fed funds rate at its current level. 

That one dissenting vote in favor of lowering interest rate came from Stephen Miran, who ironically enough will lose his seat once Warsh is confirmed. Warsh will need to cobble together at least six additional votes to go with his own in order to achieve a seven-five majority to lower interest rates. Right now, given the makeup of the voting members, it's basically impossible to imagine where those votes would come from. Two current governors, Christopher Waller and Michelle Bowman, have indicated at least an openness in previous votes to lowering rates, although neither voted for a rate cut in March. None of the other voting members have expressed any interest in lowering rates anytime soon. Kevin Warsh may find himself with few allies if and when he is confirmed as the 17th chair of the Federal Reserve.

There's one other part of Washington that doesn't get as much attention as Congress and the Fed but is extremely important to the markets and how they work. And that's the regulatory environment. Though Congress has some tough decisions ahead, history shows that big legislative actions become few and far between as the midterm elections approach. Regulatory agencies, on the other hand, tend to pick up momentum in election years as regulators are eager to get rules finalized before the election possibly changes the balance of power. And that's what's happening here in 2026. Congress seems to be slowing down while regulators are speeding up. There are several major issues in the queue, but I want to focus on three that I think investors should be keeping an eye on. 

First, the SEC is expected to release a rule proposal this month that would allow public companies to report their earnings on a semi-annual basis rather than quarterly. This is something the president called for last year, and it's an idea that has kicked around Washington for a decade or more. SEC Chairman Paul Atkins has said he is agnostic about it, but that the agency would publish a rule to make it an option for companies. Quarterly reporting has been mandated since 1970, so this would be a major change. But the proposal is expected to get some significant pushback from Wall Street, where financial firms are worried that less frequent reporting will make it harder for investors to get a clear picture of a company's financial health and performance.

Proponents argue that quarterly reports are expensive and time consuming to produce, and that company leaders would have more time to focus on strengthening the business if they weren't spending so much time preparing reports. With a proposal expected this month, the SEC is pushing to have this finalized by the end of the year. But I don't expect a dramatic change, even if the agency meets that timeline.

It's hard to see large companies suddenly announcing that they will be providing less frequent updates to investors and analysts, particularly if their competitors are continuing to report quarterly. Smaller, growing companies, on the other hand, I could see embracing the opportunity to report less frequently, reducing the cost and compliance burden of meeting the SEC's dizzying disclosure rules for public companies. 

Second, last week, the Department of Labor issued its long-awaited proposal to implement one of the president's executive orders from 2025, which would allow alternative assets like gold, cryptocurrency, and private funds to be included as investment options in a 401(k) plan. The proposal focuses broadly on how retirement plan fiduciaries should select and oversee all investment options for a plan. It sets out a process with six factors that a plan sponsor needs to consider and address, including performance, fees, liquidity, valuation, performance benchmarks, and complexity. A plan sponsor that follows the process outlined in the proposal would be presumed to have met its fiduciary duty, likely shielding it from legal challenges. 

While the proposal is asset neutral, meaning it doesn't favor any one type of investment over any other, many of the examples in the proposal illustrate how alternative assets would be considered appropriate investment options if the fiduciary follows the process. It's hardly ideal timing for the proposal, as the private credit market has been roiled by turmoil in recent weeks.

Several large private credit funds have been forced to cap redemptions to stem a fast-moving exodus from these funds. Blue Owl, which manages one of the largest private credit funds, said last week that investors had requested to withdraw 22% of the fund's assets. But the fund capped redemptions at 5%, tying up investors' money. Private credit funds have portfolios of loans on their books, which can be difficult to sell quickly, raising the possibility of having to sell at a significant loss in order to meet redemption requests. 

Despite the turmoil among private credit funds, the Labor Department is pressing forward with the proposal, which it believes will offer retirement savers more choice and the potential for higher returns. It's not a mandate. It will ultimately be up to each plan sponsor to determine what investment options it wants to offer its employees.

But the private credit mess may end up being something of a cautionary tale as companies consider what to include in the plan. No final decisions have been made. The next step for that regulatory process is that the plan is open for public comment until June 1. The Labor Department is hopeful it can finalize the rule by the end of this year. 

And third, a quick update on Trump Accounts, the new accounts for newborns that were part of last year's One Big Beautiful Bill. Under the plan, all babies born from 2025 to 2028 will receive $1,000 from the government in a brokerage account. Parents, grandparents, employers, and friends could contribute as the money in the account continues to grow. When the child turns 18, the account becomes a traditional IRA, providing a nest egg for retirement.

The White House reports that parents have signed up more than 4 million children for the accounts. The administration is still working through some of the details of exactly how these funds will be invested, but the accounts seem to have real momentum. The administration is aiming to begin providing the $1,000 contribution by midsummer. 

I want to conclude with a few words about the November elections. We have a bit less than seven months to go until Election Day. But before we even get there, we have some special elections coming up to fill vacancies due to deaths or resignations. On April 7, a Republican in Georgia won the election to replace the controversial and outspoken former Congresswoman Marjorie Taylor Greene, who resigned in January. And on April 16, New Jersey voters will pick a successor to former Congresswoman Mikie Sherrill, a Democrat who resigned to become New Jersey's governor. A Democrat is heavily favored to win that seat.

Assuming that happens, that will bring the count in the House of Representatives to 218 Republicans and 215 Democrats, with one independent, a congressman from California, who recently switched his party affiliation from Republican to Independent, though he still caucuses with the Republicans. So effectively, it'll be 219 to 215. The final vacancy in the House will be filled by a special election in August.

Despite these one-off elections, Capitol Hill is already laser focused on November. My view on the most likely outcome has not changed much since the beginning of the year. I continue to think Democrats are likely to win that majority in the House of Representatives, while I also still think that Republicans are likely to maintain their majority in the Senate. But what is really notable about how this election is shaping up is the number of members of Congress who are not seeking re-election at all this fall.

There are 57 House members who are retiring or leaving the House to seek another office, like governor or senator. That's the second highest number of departures in an election year ever, topped only by the 65 who decided not to seek re-election back in 1992. Together, the retiring members have nearly 750 years of experience in the House. 

And there are 11 senators who are not running for re-election. The most recent departure was Markwayne Mullen, a Republican senator from Oklahoma who resigned on March 23 to become the new secretary of Homeland Security. The senator appointed to replace him, Alex Armstrong, is not even allowed by Oklahoma law to run for the seat in November. There's a very real possibility that we will see even more retirement announcements in the coming days. 

Congress is currently on its two-week Easter break. And that's often a time when lawmakers discuss their plans with their families and make their final decisions about whether to run in the fall or not. There are lots of reasons for a lawmaker to decide not to seek re-election. Some decisions are health or family or age related. Some have other aspirations, like becoming governor. But in 2026, many of those retiring seem to be doing so because the job itself has become, well, increasingly miserable.

Both chambers are highly dysfunctional and can barely get any substantive work done. Both are extremely partisan, where members who are genuinely interested in working across the aisle to find common ground are all but shunned by their own party for doing so. And this president has issued more than 250 executive orders, many of which are designed to take power away from Congress, rendering the legislative branch increasingly irrelevant.

Yet the job requires a grueling travel schedule, especially for lawmakers in the western half of the country, time away from family, a relentless pressure to raise money for re-election, and countless difficult messaging votes each year that have little chance of success, but a high chance that your campaign opponent will use them in a television commercial to try to convince voters of how out of touch and heartless you are. And it's unlikely to get much better. The gerrymandering frenzy means that there are few competitive House races, resulting in both parties electing politicians who are further away from the center.

The current analysis by the nonpartisan Cook Political Report ranks just 17 out of 435 House races as toss-ups and finds that just 19 more are in the lean Republican or lean Democrat category. In other words, fewer than 10% of all House elections could be described as truly competitive. 

There are signs that this could be a wave election for the Democrats. Midterm elections are notoriously terrible for the president's party. In the last hundred years, only three times has the president's party gained seats in the house in a midterm election. For example, in his first midterm election, President Barack Obama lost 63 Democrat seats in the house. The president's approval rating is a big indicator as well. The party generally loses seats in the midterms if his approval rating is below 50%. And below 40% usually means a big wave is coming. With Trump's approval rating hovering right around 40%, that's not a good political environment for Republicans. 

But this year's election may not exactly follow those rules. The gerrymander in the House means that a big win for the Democrats would be gaining perhaps 12 to 15 seats, not 50 or 60 or more. And the Senate landscape remains difficult for Democrats to flip four seats and win the majority, given how many Republican seats are in ruby red states. The bottom line is that I'm expecting a split Congress after the election. It's a recipe for gridlock, which, frankly, we kind of have now with an all-Republican Washington. Of course, there's plenty of time for things to change between now and November 3. I'll provide periodic updates on whether the outlook changes as we move towards the fall.

So what's the big takeaway from all of these moving parts? Well, I don't think this uncertainty will dissipate quickly. There are so many unknowns right now for investors, business leaders, and consumers—how long the war in Iran will last, what the implications will be for the economy, when or if oil and gas prices will come down, how the Fed will react, whether Congress can get out of its own way and do simple things like provide necessary funding for basic government operations. Plus, there's a looming election that could flip the narrative in Washington. And that's just a few sources of uncertainty. 

When things are uncertain, it's a good time to check your asset allocation, to make sure you have a diversified portfolio that can absorb some volatility, to maybe consider whether your risk tolerance has changed. The road ahead may be bit bumpy. So talk to your financial advisor if you have concerns about riding out those bumps. 

Well, that's all for this week's episode of WashingtonWise. We'll be back in two weeks with a new episode when Joe Mazzola, Schwab's head trading and derivative strategist, will join me to take a deeper dive into the market implications of everything going on right now and offer some real-world suggestions on how investors can navigate this volatile market.

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 don't forget to 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.