This is a rush transcript from "Special Report with Bret Baier," January 17, 2018. This copy may not be in its final form and may be updated.

(BEGIN VIDEO CLIPS)

REP. LINDA SANCEHZ, D-CALIF.: Keeping government open is a basic function that should be a no-brainer, and yet Republicans struggle to find the support they need.

SARAH SANDERS, WHITE HOUSE PRESS SECRETARY: The president certainly doesn't want a shutdown, and if one happens I think you only have one place to look, and that's to the Democrats.

SENATE MINORITY LEADER CHARLES SCHUMER, D-N.Y.: If, God forbid, there is a shutdown, it will fall on the majority leader's shoulders and the president's shoulders.

(END VIDEO CLIP)

BRET BAIER, ANCHOR: This back and forth as they shut down looms. White House Chief of Staff John Kelly says he believes, the administration believes they have the votes on a short term continuing resolution to keep the government open.

Let's bring in our panel: Steve Hayes, editor in chief of The Weekly Standard; Mollie Hemingway, senior editor at The Federalist, and Michael Crowley, senior foreign affairs correspondent for Politico. Let's start there with this back-and-forth over funding, DACA, and the explanations there. Your thoughts, Steve?

STEVE HAYES, THE WEEKLY STANDARD: Very interesting. I thought John Kelly was pretty clearly signaling that the White House is ready to make a deal. It might not be a deal that they can make this week but he in a sense confirmed The Washington Post's account when you asked him about that. The president was uninformed about the wall. He said that there wouldn't be a wall that stretches across the entire border. He allowed that there might be a virtual wall, and he confirmed that he told the Congressional Hispanic Caucus today that Mexico won't pay for the wall.

Take a second and think if the people who attended Donald Trump's rallies back a year and half ago knew that three days before the one-year anniversary of his inauguration that's what the chief of staff would've come on your show to say. I think it would be bracing. But it seems to me he wants to send a signal, send a message the president is willing to deal.

BAIER: It also seems that Senator Graham has lost a little favor in the White House, maybe.

MOLLIE HEMINGWAY, THE FEDERALIST: Yes, and bringing forth a bill that failed to in any way come close to doing what it needed to do probably wasn't Senator Graham's best move.

But Donald Trump was saying a year ago that the wall wouldn't be the entire extent of the border. That was in The New York Times. He has kind of continuously said this. It's not like it news that was broken tonight that he has some flexibility on this.

But he does have -- this is a moment in time when a lot needs to be accomplished. We need to move toward more merit-based immigration. There are problems with random visa lotteries. There are problems with chain migration. There is a complete lack of border security and enforcement. These are things that need to happen and Donald Trump has signaled he's completely willing to work on a DACA fix and also that these things need to happen.

It seems like the real question is not whether Donald Trump is willing to negotiate but whether Democrats are actually interested in a negotiation. This is an issue that can kind of keep their base very excited and keep them voting. They might not have the incentive to come to a fix as much as they say they do.

BAIER: Michael?

MICHAEL CROWLEY, POLITICO: I was struck by Kelly's use of the word "flexibility." This was a picture of a White House that wants a deal, and Kelly was saying this is a president who is flexible, this is a president who is learning on the job.

BAIER: Evolved.

CROWLEY: Evolved. He cited even the president's position on Afghanistan after Trump at times had said that we should leave Afghanistan and then ended up --

BAIER: Which is true, that did happen.

CROWLEY: And when he gave that speech I think actually it was one of the more significant moments in his public rhetoric at least where he said it looks different from behind the desk when you're sitting here behind the desk. So I thought Kelly was significant -- Kelly was trying to signal that sense of flexibility.

I do think that Republicans are in a bind here. They control the House, the Senate, and the White House. And although we have heard Republicans saying we are going to pin this on Democrats and Democrats are to blame, I think that is a tough argument to make with a public that doesn't follow the ins and outs of government very closely but they know who controls the Congress and the White House.

BAIER: I do want to play the sound bite from Mac Thornberry and Senator Blumenthal about the military.

(BEGIN VIDEO CLIPS)

REP. MAC THORNBERRY, R-TEXAS: Every day under these stopgap measures does damage to the military.

If we could vote on the merits of this issue, the military would be taken care of and then we could go to debate the other issue. But unfortunately the military is being held hostage to these other political issues.

SEN. RICHARD BLUMENTHAL, D-CONN.: I will vote against a short-term spending bill. It holds hostage not only the Dreamers but also defense spending.

(END VIDEO CLIPS)

BAIER: Kelly acknowledged, Steve, that this is not the way they want to go and they would like to see funding for the military. It seems like they are backed up against the corner here.

HAYES: Look, this is a horrible way to run funding for the military. It affects readiness, it affects long-term planning, it affects basically every aspect of the U.S. military and how it conducts its affairs. You have a group of hawks in the Republican conference in the House of Representatives who want a standalone vote simply on military spending for one year.

BAIER: Which would really be a political vote because you'd be backing the Democrats into saying we don't want this --

HAYES: It would certainly have political implications. They would argue that it would be a substantive vote. Let's take it out of the politics. Let's have a vote on this and this alone and pass it in the House of Representatives and then count on Democrats to deliver an additional eight to ten votes in the Senate. I don't think it's an impossible task when you look at the number of Democrats who voted to reauthorize Section 702 of the FISA reauthorization, there were what, 18, 19 Democrats who voted for that. I think you can get nine or ten, 11 who would vote for it in the Senate.

BAIER: Quickly, they are going to do a CR and we're going to fight this in February?

HEMINGWAY: Presumably. That's what has to be done.

CROWLEY: Yes, absolutely. And the good news for Republicans, you have a bunch of Democrats in Trump states who are worried about their reelection, so that is a way Republicans can pull some Democrats to the center at least in the Senate.

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