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The economy continues to face a recession. Budget cuts included President Joe Biden and the Speaker of the House Kevin McCarthyThe US deal to raise the debt ceiling does not go deep enough to break the debt ceiling.
Republicans have insisted for months that any deal to raise the debt limit must be accompanied by drastic cuts in government spending. They argued that the US economy needed a high level of fiscal discipline to reverse inflation, which has been a hallmark of Biden’s economy for more than a year.
But neither party showed interest in addressing important issues like Social Security, Medicare, or defense spending. And when it became clear that the White House would largely block any crackdown on funds approved by Biden’s landmark legislative achievements – the Inflation Reduction Act and CHIPS – it pledged that the macroeconomic impact of any deal would be negligible.
Brian Riedl, a senior fellow at the Manhattan Institute and former chief economist for retired Ohio Republican Senator Rob Portman, said Sunday that the headline limits for regular, non-emergency discretionary spending have so many “cautions and asterisks.” [that] can largely render those numbers meaningless.” (Underlining why the deal has angered many right-wing Republican policymakers—including Florida Gov. Ron DeSantis.)
The cuts would amount to a “rounding error” in GDP, Riedl told MM.
Mark Zandi, Moody’s chief economist, whose warnings of the potential damage to the economy from the Republican Party’s proposed cuts were vocalized by the White House last month, said the deal’s macroeconomic impact would be muted.
“It’s nowhere near as draconian as the Limit, Save, Grow Act,” Zandi said in an interview. The restrictions on discretionary spending could cost the economy about 120,000 jobs — which would raise the unemployment rate by about a tenth of a percentage point — and cut gross domestic product by less than a fifth of a percent, he said.
That’s a far cry from the millions in job losses and the sharp economic downturn that the White House said was imminent if Republicans got whatever they wanted. While the Biden-McCarthy deal will weigh on a vulnerable economy, it won’t create enough drag to push it into recession, Zandi said.
“The timing is bad given the fragility of the economy and the high risks of recession, but I don’t think this is the cause of the crisis,” he said.
Of course, the economy is still at risk. Rating agencies could downgrade government bonds even if Biden signs a debt cap agreement in time. This will make borrowing costs more expensive and markets could falter. Once the Treasury issues new debt, funds could flow out of the banks, potentially causing more chaos for a sector that has weathered this spring’s turmoil.
One more thing: While the macroeconomic impact is small, the cuts in state safety nets — including new job requirements in two federal aid programs — will be felt in a recession.
“The concern on the Democratic side — regarding how these cuts align with a possible looming recession — is more about the human impact of the cuts and less about the economic impact of the cuts,” said Tobin Marcus, a senior US politician and politician Policy strategist at Evercore ISI, who previously served as Biden’s advisor, told MM.
However, the political consequences of human influence are likely to be nil. These are not safety nets for banks and corporations. The constituencies they serve “are not typically the voters with the most voting rights,” Marcus said. They don’t have “a greater ability to make their voice heard.”
Even in a recession, “I don’t know that’s going to create any real political headwinds for Democrats,” he added.
IT’S TUESDAY – We hope you had a wonderful Memorial Day. Send tips, gossip and suggestions to Sam at [email protected] and Zach at [email protected].
TODAY… Richmond Fed President Tom Barkin to speak at 1 p.m. National Association of Business Economics webinar… Former Treasury Secretary Lawrence Summers will deliver a keynote address at 7 p.m. at the Peterson Institute for International Economics and the International Monetary Fund…
WEDNESDAY…Fed Governor Michelle Bowman and Boston Fed President Susan Collins to speak at a Boston Fed event at 8:50 a.m….Senate Banking to hold hearing on China economy at 10 a.m….April job listings data will be at 10 a.m released… White House Economic Advisory Council member Heather Boushey to speak at 1:00 p.m. at Peterson/IMF conference… Fed Governor Philip Jefferson delivers remarks at 1:30 p.m…. Fed Beige Book to be released at 2:00 p.m …
THURSDAY…The FDIC will hold an advisory session on community banking at 9 a.m….Philadelphia Fed President Patrick Harker will speak on a NABE webinar at 1 p.m….
FRIDAY… May job report comes out at 8:30am
Must read – Victoria Guida details how big wage increases for low earners in recent years have created an unusual political dilemma for Biden. “Will Democrats, fearful of alienating middle-income voters battling inflation, paint the economy still recovering from the shock of the pandemic as unfinished?” Or will President Joe Biden push the benefits for low-income earners as a counterpoint to the long-established narrative that the winner gets all the benefits for the rich?”
They have yet to pass a bill — easier said than done. McCarthy said Sunday that “over 95 percent” of the Republican conference are “overwhelmingly excited about what they’re seeing,” according to our Caitlin Emma. But on Monday Rep. Chip Roy (R-Texas), a leader of the Freedom Caucus, fired a warning shot on Twitter, suggesting the speaker could face trouble in the House Rules Committee. Meanwhile, Biden officials worked all weekend to calm mounting frustration over new job demands in two state aid programs, Jennifer Haberkorn, Holly Otterbein and Adam Cancryn wrote.
Even if stock futures rallied over the weekend on news of the deal, there is still a risk of default that may not be priced into the markets. “It’s the worst kind of risk,” Joseph Brusuelas, chief economist at consultancy RSM US, told your host on Monday. It is “an unsystematic risk that cannot be properly quantified”. It’s Wall Street’s Achilles heel.”
That means the prioritization is still theoretically on the table — Treasury Secretary Janet Yellen told lawmakers Friday the department would make Social Security, Veterans and Medicare payments on June 1 and 2 — which will keep the coffers of the Treasury Department practically exhausted and ensures that June 5th will be the tough deadline for raising the debt ceiling. Democrats such as Rep. Pramila Jayapal (Washington) and Brad Sherman (California) told Eleanor Mueller last week that uncertainty about whether the government would meet its obligations, particularly to Social Security recipients, has put significant pressure on the process.
Now that those payments are being made, the Department could face agonizing and complicated decisions about where the tax revenues should go. Just making Social Security and debt payments on time would mean 40 percent cuts in almost everything else, Wendy Edelberg, director of the Hamilton Project at the Brookings Institution and former chief economist at the Congressional Budget Office, told Victoria.
George Madison, who served as Treasury Department general counsel during the fierce debt ceiling battle of 2011, agreed, pointing out that around 70 percent of government spending on Social Security, Medicare, Medicaid, and interest is on debt, so basically taken there is no room left for payments on anything else if you prioritize them.
A default is still a possibility and markets are bracing for the worst – As IMF Managing Director Kristalina Georgieva stressed on Friday, Treasury markets are “the anchor of stability for the global financial system.” When you pull the anchor, the world economy – the ship we all travel on – is in choppy and worse, uncharted waters.”
Treasury and Fed officials, along with the Securities Industry and Financial Markets Association and BNY Mellon — the clearing bank for Treasury settlements and a major player in cash markets — have spent years preparing for what happens when things get out of hand .
According to two sources who spoke to Treasury and Fed officials, the most likely event, at least for now, is that the Treasury would give advance notice if coupon or principal payments needed to be delayed. The Department would also extend the maturity of these securities, leaving them transferrable through the Fed’s payments system, allowing for normal trading and transfers.
SIFMA outlined these scenarios in a recent report. Still, Treasury yields maturing around the “X-Date” have been spiking for months, a sign that investors are demanding a significant risk premium while the US stares at a potential default.
“Most agreements state that defaulted securities cannot be used as collateral,” said David Sekera, chief US market strategist at Morningstar Research Services. “In that case, I would hope that most parties would realize that even in the event of a short-term default, people will still view US Treasuries as having monetary value.”
And if you need a reminder of the consequences – our Katy O’Donnell: “A US debt default could derail an already fragile housing market if Republicans and the White House fail to reach an agreement to raise the debt ceiling. “
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