Economists had harbored some faint hope that if the U.S. economy started to rapidly slow Congress might come to the rescue with some form of fiscal stimulus.
Such hopes are now dashed in the wake of the decision by House Democrats to launch a formal impeachment inquiry into President Donald Trump, said Joshua Shapiro, chief U.S. economist at MFR Inc.
Read: Why Trump impeachment threat is rattling stock-market investors
The two political parties will now retreat into their corners, unwilling to make the compromises necessary to pass significant legislation, Shapiro said. It will be hard for Trump to work with Congress.
Shapiro said the looming 2020 election had already hardened the two parties against cooperation. “Maybe impeachment hardens that, [but] it was pretty hard already,” he said.
House Democrats disputed the notion that legislative work would cease because of the consideration of impeachment.
“There is no reason why the business of the American people should not continue,” said Rep. Hakeem Jeffries, a Democrat of New York.
Jeffries, the chairman of the House Democratic Caucus, told reporters that both Richard Nixon and Bill Clinton continued to work with Congress at the same time they were facing impeachment. “The same thing should happen this time around,” Jeffries said.
Shapiro is one of the most pessimistic economists on Wall Street, predicting the economy will flat line in 2020. There already have been “early signs we’re tipping down here,” he said.
Economists who are arguing the economy is fine are pointing to the payroll report and jobless claims, which, said Shapiro, are “coincident indicators that can turn on the dime.”
He added: “It is like people ahead of the landfall of a hurricane who say it’s beautiful outside.”
With the economy faltering, the Fed will eventually have to cut interest rates back to basically zero, he said.
The Fed’s benchmark interest rate is now set in a range of 1.75% to 2%, leaving comparatively little room to push them lower. In every recession since the 1970s, the Fed was able to cut interest rates by more than 500 basis points, noted former Treasury Secretary Lawrence Summers.
In an environment of limited Fed ammunition, congressional action might have been helpful, Shapiro said. “An infrastructure bill would be nice, but they can’t seem to agree on that,” he said.
Lewis Alexander, chief U.S. economist at Nomura Securities, noted that Trump and Congress must work together this fall to avoid another government shutdown. Legislation keeping the government open expires on Nov. 21.
Read on: Many legislative efforts in Washington already were effectively dead, analyst notes
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