WASHINGTON — Speaker Kevin McCarthy chose the New York Stock Exchange Monday for his most detailed commentary on demands by House Republicans to raise the nation's borrowing limit. But his comments had little effect on Wall Street, where investors continued to trade stocks and Treasury bonds on the assumption that Congress and President Biden would find a way to avoid a disastrous government default.
The lack of market panic about the talks reflects the made-for-it stance investors are increasingly taking to partisan showdowns over taxes, spending, and the government's ability to pay its bills on time, which are often resolved by lawmakers at the last resort. moment.
But there is reason to believe it could be different this time, starting with chaos in McCarthy's caucus – and fresh warnings that lawmakers may have less time to raise the $31.4 trillion cap than previously thought.
The next few weeks will more precisely determine how quickly the government will exhaust its ability to pay bondholders, employees, Social Security recipients, and everyone else they send money on a regular basis. That's because government tax receipt data for the year will come into sharper focus after Tuesday's deadline for people to file personal income tax returns for 2022.
On Tuesday, Goldman Sachs economists issued a warning that the potential default date could be much earlier than previously thought – which is usually set in July or August – if earnings weaken. “While the data is still very preliminary, the weak tax collection so far in April suggests an increased likelihood that the debt limit deadline will be reached in the first half of June,” they wrote.
Understand the US Debt Ceiling
What is a debt ceiling? The debt ceiling, also called the debt limit, is the upper limit on the total amount of money the federal government is permitted to borrow through US Treasury Department securities, such as savings bills and bonds, to meet its financial obligations. Because the United States ran a budget deficit, it had to borrow large sums of money to pay its bills.
Republicans refuse to raise the lending limit unless Mr. Biden agrees to reduce government spending and slow the growth of the national debt, a position that risks plunging the United States into recession if the Treasury runs out of money to pay all of its bills. time. But Mr McCarthy has struggled to unite Republicans around certain cuts, though he said Monday he would put such a plan on the House floor next week.
Moderates in the Republican caucus are wary of sweeping cuts to popular domestic programs, such as education and National Parks, which his proposal would encourage to limit growth in domestic spending at a rate well below current inflation rates. The fiscal eagles, including the faction that opposed McCarthy's appointment as speaker and could effectively force a vote to oust him at any time, have pushed for a much more aggressive cut. They include lawmakers who have never voted to raise or suspend the debt limit, even under former President Donald J. Trump, who signed off on three suspensions from the limit into law.
Mr McCarthy detailed his plans to fellow Republicans on Tuesday. As outlined on Monday, that will raise the cap for about a year. It would also return most domestic spending to fiscal 2022 levels and limit its growth for a decade. Mr McCarthy also wants to add work requirements for recipients of federal food aid and reduce federal regulations on fossil fuel development and other projects, which he says will boost economic growth.
It's unclear whether enough Republicans will vote for the package to ensure its passage in the House. Senate Democrats will almost certainly reject it, as will Mr. Biden, who has repeatedly said he expects Congress to raise the no-strings-attached lending limit.
Mr. Biden has given no indication that he will intervene to speed up discussions on increasing the limit, or seek to broker any agreement in Congress to do so. The president said he would negotiate tax and spending rates separately from the lending limit. But he and his aides have refused to engage further with Mr McCarthy on fiscal policy until Republicans endorse the budget plan.
“It's very difficult to say we have something that we know will be a proposal” from Republicans on spending cuts, Lael Brainard, director of the National Economic Council. Biden, said at a media outlet the Semaphore World Economic Summit in Washington last week. “But we're looking forward to it.”
The only market so far reflecting pressures about debt limits is the one most closely aligned with: Credit default swaps, which reward the risk of government failure to make scheduled payments to bondholders. Mr McCarthy shrugged off the pressure in a question-and-answer session after his speech on Monday.
“The market goes up and down,” he said.
The stock and bond markets were not affected after Mr McCarthy's comments. They have in recent months been far more reactive to any evidence of what the Federal Reserve may do next in its campaign to tame high inflation by raising interest rates.
Several White House officials have privately said they expect Republicans to step up their efforts to raise the cap if and when investors start to worry more about the negotiations. That was the case in 2011, when a row between Republican members of Congress and former President Barack Obama nearly ended in default. Stocks fell and borrowing costs rose for companies and home buyers. The damage took months to repair.
Several Republicans also hope the resurgence on Wall Street will prompt Biden to change his negotiating stance, including Representative Patrick McHenry, a Republican from North Carolina and chairman of the House Financial Services Committee.
“I don't think market participants know how bad the negotiations are right now, that should make them pause and worry, and should bring the president to the negotiating table,” he said.
Appearing before Mr McHenry's committee on Tuesday, the chairman of the Securities and Exchange Commission, Gary Gensler, warned that a default on US debt “is going to be one hell of a mess in the capital markets.”
“It will hurt equity markets, it will hurt other fixed income markets, and it will affect the banking system,” he said.
Catie Edmondson reporting contribution.