Brace yourself! The debt ceiling standoff continues.
Consumers aren’t optimistic. The Consumer Sentiment Index fell to a six-month low in May, dropping 9.1 percent month-to-month. Participants in the University of Michigan survey were:
- Less concerned about current economic conditions (down 5.4 percent, month-to-month), and
- More concerned about future economic conditions (down 11.7 percent, month-to-month).
They were wary about the outcome of debt ceiling discussions, concerned that policymakers will cause the United States to default on its debt, and apprehensive about how that could impact the economy, according to Director of Surveys Joanne Hsu.
What is the debt ceiling?
The debt ceiling is the amount of money the United States government is allowed to borrow to pay debts it has already incurred. These payments include interest on Treasuries, military salaries, Social Security and Medicare benefits, tax refunds, and other financial obligations. The debt ceiling has been lifted 78 times since 1960.
What happens if policymakers don’t raise the debt ceiling?
No one knows for certain, although many economists, analysts, and the financial press are concerned. Here’s what some have said:
“…the U.S. federal government would face various unpalatable options, ranging from delaying payments to contractors, Social Security recipients, Medicare providers or agencies; to defaults on payments on US government debt.”
—Chris Giles and Colby Smith, Financial Times, May 7, 2023
“A technical failure by the U.S. to meet its obligations would impact those Treasuries coming due most immediately. Bill markets are pricing in some risk of default in early June…A default threatens to spur big moves around the globe, with the prospect of a major economic downturn and a reassessment of Fed monetary policy potentially igniting a perverse bid for Treasury bonds on haven demand. Conversely, a resolution could shift the focus back to the outlook for inflation and the credit cycle for traders betting on whether the era of aggressive Fed interest-rate hikes has peaked.”
—Benjamin Purvis, Michael Mackenzie and Ye Xie, Bloomberg, May 13, 2023
“Potential repercussions of reaching the ceiling include a downgrade by credit rating agencies, increased borrowing costs for businesses and homeowners alike, and a drop off in consumer confidence that could shock the U.S. financial market and tip the economy into recession.”
—Noah Berman, Council on Foreign Relations, May 2, 2023
Many observers believe a deal will be reached before the June 1 deadline. “If you’re a long-term investor, there’s a strong case to do nothing. If history is a guide, a deal to avoid a default will be struck,” reported Lauren Foster of Barron’s.
Last week, major U.S. stock indices finished the week with mixed performance, reported Barron’s. The Dow Jones Industrial Average and the Standard & Poor’s 500 Index lost value, while the Nasdaq Composite gained. The yield on the one-month Treasury bill finished the week 28 basis points higher than where it started.
