Deal Prospects
The slow legislative pace makes it unlikely a deal is reached by month-end, something market participants have at least partly discounted. Senate Republicans plan to start discussing a draft bill in the middle of next week, just days before the unemployment benefits run out, with votes in subsequent weeks. But with unemployment above 10% and jobless claims climbing by more than 1 million a week, many households will be forced to curb spending as they await help.
In the end, economists at banks including Deutsche Bank and Goldman Sachs Group Inc. have predicted a partial extension of the extra unemployment payouts.
“The market is essentially trading on the idea that it will get done,” said John Velis, a strategist at Bank of New York Mellon. “Volatility will certainly creep back” if Washington fails to act expeditiously, he said.
Failure to make progress by the time of a scheduled Aug. 10 break could trigger a response not only in asset prices but also concerns at the central bank. The Federal Reserve has proved the ultimate backstop for markets this year, with its credit and liquidity programs helping prevent a deeper economic collapse, along with the biggest-ever 50-day rally in American equities.
“How this plays out when Congress returns from the July recess will have significant bearing on the Fed’s strategy,” said Brett Ryan, a senior economist at Deutsche Bank in New York.
Senate lawmakers return to work July 20.