You are here
Home > News > U.S. Debt deal ever-closer, as default looms

U.S. Debt deal ever-closer, as default looms

Negotiators for Joe Biden’s Democrats told the president on Friday that they are making “steady progress” in talks with Republicans aimed at avoiding a U.S. default, just days after Biden and top U.S. congressional Republican Kevin McCarthy underscored their determination to strike a deal to raise the government’s USD 31.4 trillion debt ceiling.

The debt ceiling deal’s ‘deadline’ is set for June 1, as Treasury Secretary Janet Yellen announced that it would be the last day the U.S. treasury would be able to pay the government’s bills. If the GOP (Republican Party) and the Democrats do not come into agreement until that time the U.S. government could go into default.

Treasury Secretary Janet Yellen on Monday reiterated previous warnings that the federal government could deplete its cash reserves by June 1. Still, the exact day when the U.S. will reach the so-called X-date is hard to pin down.

— The New York Times (@nytimes) May 18, 2023

Contrary to media assurances that a deal is sure to come before the ‘deadline’, most Republicans do not want to pass a blank debt increase, insisting that the deal should come with some government spending cuts.

Limit, Save, Grow Act

Earlier on April 26, House Republicans passed their own “Limit, Save, Grow Act”, which if passed through the Senate and signed by the President, would increase the U.S. debt by USD 1.5 trillion, while cutting USD 4.8 trillion in government spending.

Maybe you could just sign the bill that the House already passed.

Why do Democrats keep acting like we didn’t already pass a debt ceiling increase? It’s bizarre.

— Dan Crenshaw (@DanCrenshawTX) May 18, 2023

According to the Washington Post, the House Freedom Caucus said it is urging House Speaker Kevin McCarthy to put off talks with the White House on raising the debt ceiling and instead concentrate on getting the Senate to enact the “Limit, Save, Grow Act,”.

Biden says U.S. debt ceiling talks are ‘moving along’

U.S. President Joe Biden has indicated that discussions regarding the increase of the U.S. government’s debt limit are progressing. He revealed…

see more

“We’re not there, we haven’t agreed to anything yet. But I see the path that we can come to an agreement,” McCarthy told reporters on Thursday.

Predicting Fed’s next moves

Meanwhile, the dollar held at around six-month highs against the yen and seven-week highs against the euro on Friday, as robust economic data reduced the chances of a series of U.S. rate cuts this year.

At the same time, data pointing to a still-tight labor market, with the number of Americans filing new claims for unemployment benefits falling more than expected last week, also raised expectations that the Federal Reserve could raise rates again next month to tame inflation.

The dollar index traded at its highest in two months, having risen by nearly 2.5% in the last two weeks alone, as investors have rushed to reassess their expectations for what the central bank might do next.

“The message from the Fed has been really hawkish. We know there has been this divergence between what the market’s expecting and what the Fed has actually been saying and that was always going to need to be reconciled at some point. We’re starting to see this play out in the FX market now,” City Index strategist Fiona Cincotta said.

“As far as expectations for a June rate hike are concerned, those have risen significantly in the last week. The market is pricing in a 40% chance and that is up from 15% a week ago,” she added.

Correcting expectations

Two Fed policymakers said on Thursday that U.S. inflation does not look like it is cooling fast enough to allow the Fed to pause it’s tightening campaign.

Money markets show traders now believe U.S. rates will fall to around 4.86% by year-end, compared with an expectation for a drop to 4.25% just two weeks ago – reflecting how the chances of a flurry of rate cuts have dropped.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.