PIMCO: Government shutdown, Fed nomination, and Democratic victories in Texas
By Libby Cantrill, Head of Public Policy, PIMCO
What’s happening?
- On the heels of what felt like a very long January, February starts with the government partially shut down
- President Trump announcing his nomination of Kevin Warsh as Federal Reserve Chairman
- Democrats winning big in a series of special elections in Texas over the weekend
First thing is first: The government is partially shut down, but (probably) not for long
On Friday, the Senate – on a wide bipartisan basis (71–29) – passed a compromise bill that would fund the outstanding part of the government until the end of FY2026, including the Pentagon, Department of Labor and Department of Transportation, as well as passing a standalone, stop-gap bill that would separately fund the Department of Homeland Security.
The big difference between the fall – when we saw the longest full shutdown in history – and this time around is President Donald Trump’s engagement. The White House has been central to driving the funding compromise to clear the decks on the issue, and we expect President Trump will be whipping the funding bill in the House to get it passed this week. Plus, President Trump and Republicans largely have an incentive to move on from the issue of immigration as the polling on it – once a strength – has recently (and quickly) turned into a liability.
President Trump announces Kevin Warsh as his nominee to lead the Federal Reserve
On Friday, after months of speculation, President Trump announced the nomination of Kevin Warsh as the next Federal Reserve Chairman.
We do not expect Warsh to have any trouble ultimately getting confirmed, although he is unlikely to sail through the Senate confirmation process as easily as he did back in 2006 when he received effectively unanimous support for his nomination. For one, the Federal Reserve’s independence will be central for legislators who are likely to press Warsh on his commitment to keeping the central bank above the partisan fray.
We also do not expect Senate confirmation anytime soon. Senator Thom Tillis (R-NC), the retiring swing vote on the Senate Banking Committee, has vowed to hold up the nomination until the Trump administration withdraws the criminal investigation into Jerome Powell, current Fed chair. While it is anyone’s guess, the Trump administration could quietly withdraw the investigation to make way for Senate confirmation process to have Warsh in by June.
Texas special elections: A fluke or a future trend?
Over the weekend, voters in Texas took to the polls to vote in several special elections across Texas. One of those elections – for an open state senate seat – saw a Democrat, Taylor Rehmet defeat Republican Leigh Wambsganss - winning by 14 points and representing a 31-point swing from how Trump did in the 2024 election in the same district (+17). While it is always dangerous to read too much into special elections, a 31-point swing in what has been described as a “ruby red” district (that no Democrat has held since the 1970s), has received quite a lot of attention and handwringing by Republicans.
With 9 months to go, we are still in early days of the midterm cycle. While the signals point to a Democratic victory in the House (and maybe in the Senate, although that is significantly less likely), a lot can change. Republicans are counting on the political benefits of the One Big Beautiful Bill being increasingly felt over the next few months, as folks receive hefty refunds (on average $1K / household) as well as benefit from lower tax withholding and higher take-home pay. Cues in late summer and early fall will likely be more instructive.