In Washington, the distance is roughly 2.4 miles from the Federal Reserve Building to Capitol Hill. After the Fed announcement next week, investors may want to make a mental journey between these two buildings.
While Fed policy and “taper tantrums” defined the summer and early September, market attention is likely to shift toward Congress for the remainder of the fall. This is because a number of issues up for debate all have the potential to add to near-term volatility. Here is a list of the four key ones to watch:
1. Budget Battles – Much like Macbeth’s soliloquy, the coming debate over the US budget will probably represent “sound and fury, signifying nothing.” There are two separate budget issues that need to be addressed: the continuing resolution to fund the government, which expires on September 30th, and the debt ceiling, which should be hit by the end of October. My expectation is that both issues will ultimately be addressed. That said, while I don’t expect another debt ceiling crisis, the odds of meaningful fiscal or tax reforms are low in the current political climate. In other words, I expect neither a government shutdown nor progress on the country’s longer-term fiscal issues.
2. The Next Fed Chairman -This issue has the most potential to disrupt markets. The president is clearly giving serious consideration to Lawrence Summers as a potential successor to Fed Chairman Bernanke. Although we don’t believe that any of the short-listed candidates would implement materially different policies, Larry Summers is more of an unknown, at least from a monetary perspective. As such, his appointment could introduce some short-term volatility to bond markets, particularly given that there is a non-trivial chance that the Senate Banking Committee or the full Senate won’t confirm his nomination.