Macro update (FY25 funding)

Recent/upcoming developments… The bipartisan leaders of the House and Senate Appropriations Committees continue to indicate they are close to reaching a deal on top-line spending levels for the remainder of FY25.  The current extension of FY25 funding expires on 3/14, and if resolution is not reached by then, government operations will “shut down.”  Despite bipartisan progress towards resolving FY25 funding levels, Democrats are insisting that language be included in the bill that would constrain the work of the DOGE.  Republicans are strongly rejecting that language.  Given this standoff, Speaker Johnson has indicated a “continuing resolution (CR)” (i.e., extension of funding at current levels) through the remainder of FY25 will likely be necessary.   Key players on defense policy in particular are concerned about a full-year CR, which has never happened, given that it would not allow for new funding allocations to specific programs.

Our outlook… Democrats are not threatening to shut down the government over the DOGE language (e.g., when asked about how much Democrats were going to insist on this language, House Minority Leader Jeffries deferred to Rep. Delauro (D-CT), the Ranking Member on the Appropriations Committee).  Given Republican willingness to embrace a full-year CR and Democrats reluctance to be blamed for a government shutdown, the probability of that outcome remains limited (15%).  The most likely outcome (40%) is that a CR is adopted that extends current funding levels through the remainder of FY25, with a one-month CR that allows for continued negotiations the next most likely outcome (30%), and full resolution of FY25 funding in the next couple of weeks only at 15%, primarily because of the lack of time that remains prior to 3/14.

Watch for these developments… The most important variable to watch is any indication Democrats are backing off their insistence the FY25 funding bill includes DOGE restrictions.  Assuming they do back off this demand, and negotiations move forward, we are also looking for any indication that President Trump, Elon Musk or conservatives object to a full appropriations bill and instead prefer to just passing a CR through the rest of FY25, as they have in the past.