Each year by October 1, Congress must approve 12 spending bills to allow the Federal Government to continue performing certain functions.  These bills only cover discretionary spending, not mandatory spending, for programs whose outlays must be explicitly set and authorized each year. Examples include national defense, educational grants, and medical care for veterans.  In 2023, discretionary outlays comprised approximately 30% of total Federal spending.

If Congress fails to pass reconciled versions of all twelve bills by October 1, activities funded by discretionary spending would cease and the federal government will “shutdown.”  The prospects for passing a budget bill on time appear quite slim.  To avoid a shutdown, Congress can pass a Continuing Resolution (CR) to “buy time” to continue negotiations.  The most straightforward CR would maintain spending at fiscal year 2023 levels, although in principle Congress could structure a CR with an increase or decrease compared to 2023’s level.  Any CR must be negotiated and agreed to by both the House and Senate.

Since 1990, there have been six shutdowns lasting from two days to 34 days.  The most recent shutdown occurred in 2019 and lasted 34 days. Though there is little evidence that a brief shutdown would have severe consequences on the economy, markets might react negatively in the short-term if a shutdown occurs.  Credit ratings agency Moody’s has suggested that a shutdown could prompt Moody’s to lower its AAA rating of US Treasury debt.  S&P and Fitch, the other major credit ratings agencies, previously lowered US debt below their respective top tier ratings.  Although a shutdown would not result in a default or delay in timely payment of principal or interest on US Treasury securities, Moody’s has publicly expressed concerns about the lack of fiscal discipline and of the dysfunction around the annual budget process.

Given existing concerns about the United Auto Workers union strikes, resumption of federal student loan repayments, the recent spike in oil prices and the possibility of another interest rate hike by the Federal Reserve in November, the added uncertainty of a government shutdown is not welcomed and can feel unsettling. In times like these, meeting with a financial professional can bring peace of mind and confidence in your investment strategy. Whether it’s developing a plan with the right risk profile or choosing a diversification strategy designed to minimize volatility, a financial professional can work with your personal preferences and timeline to help position you to achieve your financial goals.