Markets are bracing for two near-term challenges related to U.S. government funding. Investors can be sure of one thing: We’re in for a period of heightened, enveloping uncertainty.
The immediate challenge is the potential for a government shutdown. That happens—frequently around the October 1 start of the fiscal year—when Congress hasn’t authorized the approximately one-third of U.S. spending classified as discretionary. Absent a resolution to temporarily authorize spending, parts of the government will be shut down. It’s never pleasant, especially for workers directly affected through the loss of a paycheck. But investors, the markets, and the economy have endured shutdowns before, and no doubt can do so again.
A second and potentially greater challenge could materialize around October 18 when, the Treasury Department has warned Congress, the government will no longer be able to pay all its bills unless the $28.5 trillion statutory debt ceiling is increased or suspended.
Increases to the debt ceiling aren’t new either. They’ve occurred dozens of times over the last century, mostly matter-of-factly, a tacit acknowledgement that the bills in question are for spending that Congress has already approved. Episodes in 2011 and 2013, however, were more contentious, leading a major ratings agency to downgrade U.S. debt in the 2011 instance. Failure to address the current challenge could shake global markets even before the Treasury has exhausted its available measures to pay bills.
Greg Davis, CFA, is Vanguard’s chief investment officer, responsible for the oversight of approximately $5 trillion managed by Vanguard Fixed Income, Equity Index, and Quantitative Equity Groups. The funds managed by these groups include active and index stock and bond funds, money market funds, and stable value funds. Previously, Mr. Davis was principal and global head of Vanguard Fixed Income Group, responsible for its portfolio management, strategy, credit research, trading, and planning functions. He has also served as the company’s Asia-Pacific chief investment officer and a director of Vanguard Investments Australia. Mr. Davis is a member of the Treasury Borrowing Advisory Committee of the U.S. Department of the Treasury. Mr. Davis earned a B.S. in insurance from The Pennsylvania State University and an M.B.A. in finance from The Wharton School of the University of Pennsylvania. He is a CFA® charterholder and a member of the CFA Society of Philadelphia.