May 24, 2023 Latest on debt ceiling negotiations

A potential US default was a big concern for Federal Reserve officials when they voted to raise interest rates earlier this month, according to minutes from that meeting released on Wednesday.

Officials raised the central bank's benchmark lending rate by a quarter point to 5-5.25% in the first week of May. Among the many developments officials discussed, the economic fallout of a US default was one of them, including how the central bank would respond.

The clock is ticking down to a US default, but it’s not entirely clear when the US will officially run out of cash. It’s also not clear what a potential deal to avert a first-ever default will look like.

The day the US government will run out of cash is actually a moving target.

The US actually exceeded its borrowing authority back in January, but Treasury Secretary Janet Yellen authorized “extraordinary measures” – essentially moving money around – to give lawmakers time to act.

She has said those extraordinary measures will be exhausted as soon as June 1, but third-party estimates suggest it could end up taking weeks or even months longer.

The government takes in and spends money every day. It also takes cash from public debt it has sold to cover expenses.

The Treasury Department publishes a daily balance sheet. Last Thursday it showed an operating cash balance of $57 billion, including billions in deposits – everything from income taxes and Medicare premiums to the foreign military sales program – and $205 billion in cash from debt.

CNN’s Tami Luhby writes that if the US can limp to the middle of June, an expected infusion of estimated tax payments could forestall the so-called X date until later in the summer. Treasury officials might not even know until a day or two before the X date occurs.

You can read more about the US debt drama here.

President Joe Biden and House Republicans have a short amount of time to prevent the US from defaulting on its debt, which would impact millions of Americans and unleash economic and fiscal chaos here and around the world.

Treasury Secretary Janet Yellen has warned the government may not be able to pay all of its bills in full and on time as soon as June 1.

Here are just three ways that Americans could be affected by debt default:

Social Security payments: Payments to about 66 million retirees, disabled workers and others receive monthly Social Security benefits could be delayed in a debt default scenario, though it’s possible Treasury could continue making on-time payments because of the entitlement program’s trust fund, said Shai Akabas, director of economic policy at the Bipartisan Policy Center.

Almost two-thirds of beneficiaries rely on Social Security for half of their income, and for 40% of recipients, the payments constitute at least 90% of their income, according to the National Committee to Preserve Social Security and Medicare.

Other government payments could also be affected, including funding for food stamps; federal grants to states and municipalities for Medicaid, highways, education and other programs.

Federal employees and veterans benefits: More than 2 million federal civilian workers and around 1.4 million active-duty military members could see their paychecks delayed. Federal government contractors could also see a lag in payments, which could affect their ability to compensate their workers.

Also, certain veterans benefits, including disability payments and pensions for some low-income veterans and their surviving families, could be affected.

The economy: A debt default could trigger an economic downturn, which would prompt a spike in unemployment. It would come at a particularly fragile time — when the nation is already dealing with rising interest rates and stubbornly high inflation.

How much damage would be done would depend on how long the crisis continues. If the default lasts for about a week, then close to 1 million jobs would be lost, including in the financial sector, which would be hard hit by the stock market declines. Also, the unemployment rate would jump to about 5% and the economy would contract by nearly half a percent, according to Moody’s.

“It would be a body blow to the economy, and it would be a manufactured crisis,” said Bernard Yaros, an economist at Moody’s.

US stocks were lower in midday trading on Wednesday as concerns mounted on Wall Street over the stalled debt ceiling negotiations.

Until today, investors had remained largely optimistic that the debt ceiling would be lifted before the so-called X-date, Treasury Secretary Janet Yellen’s June 1 deadline for the United States to raise the debt ceiling or risk defaulting on its obligations.

But with just over a week left until that deadline, investors appear to be waking up to the reality that a deal may not be made.

Defaulting on the US debt would be “potentially catastrophic,” JPMorgan Chase CEO Jamie Dimon said earlier this month. “The closer you get to it, you will have panic. Markets will get volatile, maybe the stock market will go down, the Treasury markets will have their own problems,” he said. “This is not good.”

Wall Street’s key measure of volatility, the VIX, spiked by more than 10% on Wednesday.

US Treasury yields also rose Wednesday across the curve as investors weighed the risk of a default.

The Dow was down 283 points, or 0.9%, on Wednesday afternoon.

The S&P 500 also fell by 0.9%.

The Nasdaq Composite was 1% lower.

House Speaker Kevin McCarthy reiterated Wednesday morning that the two sides are still far apart on debt ceiling negotiations.

He said the only concessions Republicans are offering are spending caps and work requirements — which Democrats already rejected. 

Pressed on why additional concessions aren't being offered to Democrats on the debt limit, McCarthy said: “We've offered a lot of concessions. The cap on the spending is a Democrat idea. The work requirement was a Democrat idea."

He went on to say that he believed Democrats are being influenced by "extreme" members of their party.

"I can't help it if the Democrats would become so extreme, and now it's a party of Bernie Sanders within the party where Joe Biden was elected. Joe Biden is the President of the United States. He is the head Democrat. But if AOC (Rep. Alexandria Ocasio-Cortez) and Bernie Sanders is going to run their party, that's not my fault. I'm not even sure Bernie Sanders is a registered Democrat,” he added.  

The speaker's team is on their way to the White House to meet with negotiators.

House Speaker Kevin McCarthy was asked if Republicans should take the blame if the US defaults on its debts due to no deal being made. He said, "First of all, I don't think there will be a default."

On who deserves blame, McCarthy said that should not land with the GOP because "we're the only ones who acted."

Some context: McCarthy met with President Joe Biden at the White House on Monday, a meeting the speaker and the president both said was “productive,” but that did not yield a breakthrough in negotiations or end in a deal.

Speaking at a news conference Wednesday, House Speaker Kevin McCarthy was asked if there has been progress in the negotiations. The speaker responded, "There's differences. We know where it's at."

McCarthy went on to reiterate his position that the US government should spend less money than it has the past year. 

He went on to blame Democrats for increasing spending when they were in the majority. However, on the negotiations, McCarthy said, "I think we can make progress today. I'm hoping that we can make progress."

Even if lawmakers come to an agreement on the debt ceiling to avoid a default, Treasury Secretary Janet Yellen said she is concerned that the current impasse could usher in “substantial financial market distress” comparable to 2011.

After lawmakers raised the debt ceiling in 2011, the United States debt was downgraded for the first time. That caused a significant stock market decline and a jump in US Treasury yields.

Financial markets are “beginning to see some pressures” akin to 2011, she said.

Yields on US Treasuries have spiked in recent days as lawmakers fail to resolve the debt ceiling. Shorter-maturity bonds are seeing bigger spikes, signifying that investors view them as a riskier investment in the event that the government defaults on its debt.

IMF managing director Kristalina Georgieva believes the debt ceiling standoff will be resolved, and countries shouldn't start swapping their vast US dollar reserves for other currencies just yet.

“History tells us that US will wrestle with this notion of default but come the 11th hour it gets resolved, and I have confidence that they will see that playing again," she said at the Qatar Economic Forum, adding that the protracted nature of the talks was “unnecessary.”

The United States is the best place in the world to park money. Unrelenting demand for US government debt keeps interest rates low and makes the dollar the world’s reserve currency. And US government bonds are the most attractive investment in the world.

World is watching: But its ability to borrow trillions from countries such as China and Japan is based on an unblemished reputation for paying them back. If that reputation is tarnished, the dollar's attractiveness as a store of value would be damaged.

Still, Georgieva said that the US dollar would likely retain its reserve currency despite increasing discussion among some countries to reduce their reliance on the greenback, a move known as "de-dollarisation."