Federal spending is close to eclipsing its debt limit—the total the government can legally borrow to pay its bills. On April 25, 2023, U.S. Treasury Secretary Janet Yellen warned that failure to raise the debt ceiling would lead to an “economic catastrophe.” The closer the possibility of default becomes, the more market volatility could increase.
Government spending is getting closer to eclipsing the debt ceiling.
On April 18, 2023, Goldman Sachs analysts predicted that the government will become unable to make payments on money it owes by the first half of June, an event known as the “X-date.” On April 24, 2023, Bank of America strategists also moved their predicted X-date up from “mid-August” to “late July.” Both banks cite underperforming tax revenue estimates for the government as the basis for accelerating their timelines to default.
Traders also see a fast-approaching default: According to MarketWatch, the Treasuries market has priced in an X-date of June 6, 2023.
Negotiations over raising the debt ceiling have begun but are in rocky territory.
On April 26, 2023, the House of Representatives passed a bill to raise the debt ceiling— by a thin margin of 217 to 215. However, because of the contents of the bill, analysts expect it will face fierce resistance in the Senate and not pass in its current form.
Evercore ISI vice chairman Krishna Guha predicts that a compromise on the debt ceiling won’t be met until a “market tantrum” forces members of Congress to react.
If the government defaults on its debt, the economy may face severe consequences.
In January 2023, Mark Zandi, chief economist at Moody’s Analytics, said that if the government defaults on its debt, “It would create chaos in financial markets and completely undermine the economy; the economy would go into a severe recession.”
Speaking in Washington, Secretary Yellen said, “A default on our debt would produce an economic and financial catastrophe.”
As the debt ceiling nears, so does the potential for increased market volatility.
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