Market participants have been trying to wade through the murky policy outlook from Washington – on President Obama’s domestic priorities, the Federal Reserve’s outlook on interest rates, and plans to unwind financial rescue programs.
The U.S. Treasury and the Fed have begun to unwind some programs and are beginning to deliver some guidance on their future plans, but questions remain about the pace and scope of unwinding. And today, all eyes will look to the Federal Open Market Committee for clues on the durability of economic recovery, the job outlook, inflation, and interest rates going forward.
But yesterday’s elections may have eliminated one area of uncertainty in the markets: the likelihood for major policy domestic policy changes coming from Congress, particularly on health care reform, climate and energy policy, and financial regulatory reform.
Voters sent a fairly clear message of discontent with Washington yesterday, and members of Congress in competitive congressional districts – always hypersensitive to the mood of the electorate – were put on notice that they’d be wise to listen. Votes on health care reform, climate change and new financial regulations were always going to be difficult; they’ll be even more difficult now.
Majority Leader Harry Reid sent an unmistakable signal yesterday that getting health care reform completed and delivered to President Obama’s desk by Christmas was very unlikely. Climate change legislation was already facing an uphill battle in the U.S. Senate, and resentment among Blue Dog Democrats in the House was already high after they were forced to walk the plank to vote for the House version of a cap and trade bill earlier this year.
New financial market regulations now also appear to be a next-year issue. While House Financial Services Chairman Barney Frank is likely to get a bill through the House, the Senate is moving along a slower – and more contentious – path. Even if the Senate managed to pass a bill this year (probably impossible), reconciling differences with the House will be a major challenge.
Delaying major legislation that would impact huge swaths of our economy will give both markets and firms more time to consider the implications of reform on business models and bottom lines. And the delays and tempered ambition in Washington make the most draconian reforms less likely.
These issues aren’t going away, but for now markets will can be expected to breath a collective sigh of relief.
Tony Fratto is a CNBC on-air contributor and most recently served as Deputy Assistant to the President and Deputy Press Secretary for the Bush Administration.