Government Shutdown: What You Need to Know

With Congress unable to reach an agreement to keep government funding going, a government shutdown began when the new fiscal year started on October 1. While historically the markets have not reacted much to government shutdowns, an extended shutdown will impact the release of key economic data and could increase market volatility. Here's where things stand:

• How we got here: As of October 1, Congress hasn't passed any of the 12 annual appropriations bills needed to fund government operations during the new fiscal year that began October 1. In such situations, Congress typically passes a temporary measure, known as a "continuing resolution," that keeps funding going at current levels while the two parties negotiate a longer-term plan. On September 19, the House of Representatives passed a measure to keep funding going until November 21, but that proposal failed in the Senate. A second vote on the funding extension proposal failed on September 30. Any extension of funding needs a 60-vote supermajority to pass the Senate. With Republicans holding 53 seats, they will need Democrats to vote for a funding deal sooner or later.
• What happens (and doesn't happen) during a shutdown: An estimated 750,000 federal workers will be furloughed. Most federal workers, including military troops, are not paid during a shutdown. However, many critical government functions will continue; for example, national security and law-enforcement functions, Social Security payments, air-traffic control, and U.S. mail deliveries. Federal agencies are expected to outline what functions will be paused in the coming days. The White House has reportedly asked agencies to identify workers who could be fired, rather than just furloughed during the shutdown, but no specific plan has been announced. One item for investors to keep an eye on: The Department of Labor has said that economic data, including the monthly jobs report scheduled for October 3, as well as inflation data scheduled for mid-October, won't be released during a shutdown. That could impact the Federal Reserve's monetary policy decision-making as it prepares for its next meeting on October 28-29.
• Does the market care about government shutdowns? Historically speaking, not really. During shutdowns dating back to the 1970s, market reaction has been mixed, but the S&P 500 has actually risen during the most recent shutdowns. Some analysts believe that a shutdown could create more market volatility because of the uncertainty as to how long it will last, the lack of economic data releases and its potential impact on the Federal Reserve's monetary policy decision-making, and broader worries about government dysfunction.
• What are the key sticking points between the two parties? Democrats want Republicans to negotiate on health care and other issues in order to win their votes to lift the shutdown. They are particularly concerned about the looming expiration at the end of 2025 of enhanced subsidies to purchase health insurance via the Affordable Care Act. Republicans argue that they are willing to have those negotiations only after Democrats vote to end the shutdown. That's the current stalemate on Capitol Hill, and it is uncertain which side will blink first and when.
• Talks continue on the broader appropriations bills. While the debate about a temporary extension of government funding goes on, both the House and Senate are continuing to work on the specific appropriations bills. Each chamber has passed three of the 12 bills—those dealing with Agriculture, Military Construction and Veterans Affairs, and the legislative branch—and are working to harmonize the specifics on those bills. Once a consensus is reached, each chamber will have to vote to pass those again. Passage of those bills—and other appropriations bills—would mean that the parts of the government that are fully funded can reopen while other parts of the government remain shuttered.

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