U.S. Debt Ceiling: Political Impasse, Issues, and Implications

U.S. Debt Ceiling: Political Impasse, Issues, and Implications

Link to presentation and disclosures

Negotiations between Republicans and Democrats on increasing the debt ceiling seemingly remain at an impasse as the X-date—estimated by the Congressional Budget Office to be as early as June 1—quickly approaches. As described in the linked presentation, the probability of default on government debt service remains exceedingly low. However, things could get messy if the political skirmishing drags out, and there are risks of temporary delays in government payments of select obligations and/or a partial government shutdown that would affect some basic activities. Unfortunately, this has been the occasional result of negotiations about the debt ceiling or the government budget in recent decades. When this happens, the government has continued to service its debt and fund essential defense and national security functions, Social Security, and other income support programs. Disputes over the budget have led to partial shutdowns of other government functions and delayed funding has caused temporary disruptions. Recent history shows that when this happens, financial markets may be temporarily affected; 3-month Treasury yields tend to rise along with market volatility, but there is no clear pattern with the S&P 500. Critically, despite numerous “near-misses,” there has been no lasting impact on economic performance.

Mickey Levy, [email protected]

Mahmoud Abu Ghzalah, [email protected]

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