The U.S. House will likely pass a bill Tuesday that would prevent a historic U.S. debt default this month by raising the federal debt limit through early December, but experts warn the temporary measure—a byproduct of failed negotiations for a long-term solution—only delays decisions that may hamper markets, particularly if Democrats are forced to scale back the terms of President Joe Biden’s massive policy agenda.
House lawmakers are set to return from a one-week recess on Tuesday at 4 p.m. EDT to vote on a Senate-passed stopgap bill to raise the national debt limit by $480 billion, giving the U.S. Treasury enough cash to fulfill the government’s financial obligations until roughly December 3.
In a Monday note to lawmakers, House Speaker Nancy Pelosi (D-Calif.) said she hopes to have a “unanimous Democratic and perhaps bipartisan vote,” but also acknowledged “difficult decisions must be made very soon” as lawmakers then move to pass a long-term debt solution, $1 trillion bipartisan infrastructure plan and a multi-trillion-dollar spending package in the next two months.
But Bank of America analysts said Monday that “debt limit headaches will likely return” when the new cash starts drying up in late November because the bill’s successful passage “does nothing to resolve the underlying stalemate” between lawmakers.
Republicans have repeatedly pledged they won’t support measures to raise the debt limit given Democrats’ proposed $3.5 trillion in spending for social priorities, with Senate Minority Leader Mitch McConnell last week saying the extension is solely meant to give Democrats time to raise the debt limit on their own using a special budgetary process called reconciliation.
However, Democratic party leaders have thus far balked at the idea of using reconciliation to raise the debt limit, with Senate Majority Leader Chuck Schumer calling it too “drawn-out, convoluted and risky” a process and instead insisting on a bipartisan solution.
“The drama is far from over,” Lindsey Bell, the chief investment strategist at Ally Invest, wrote in a Tuesday email, saying the solution to debt limit negotiations may ultimately lie in trade-offs within the social spending bill, which Democrats are also looking to pass using reconciliation despite opposition from moderate party members.
Bell cautions Democrats may propose spending cuts or higher-than-expected taxes in the spending bill to help limit debt increases in the future—two measures that would each reduce corporate growth expectations. “That would weigh on stocks,” she adds, noting “the nature and size of cuts will be key to the market’s reaction.”
Democrats and Republicans struck a temporary funding deal on Thursday, helping markets pare losses from the uncertainty of a historic default. The deal came nearly two weeks after Treasury Secretary Janet Yellen warned the U.S. faced a “catastrophic” recession if lawmakers failed to raise the debt limit by October 18, with tens of millions of Americans losing Social Security and healthcare benefits among the potential consequences. “The mere appearance of Democrats and Republicans playing politics with the deadline was weighing on markets and forcing businesses to prepare for the very unlikely, but still possible, government default,” LPL Financial strategists wrote in a Monday research note. The Senate passed the measure later that evening, but hopes for a bipartisan, long-term solution quickly faded, with McConnell insisting the GOP would only engage in a “traditional” conversation to raise the limit if Democrats “abandon their efforts to ram through another historically reckless taxing and spending spree.”
In a Monday research note, strategists at LPL Financial warned this year’s debt limit debacle is closely resembling a similar impasse in 2011, during which the S&P 500 fell by over 16% in the span of 21 days. “That large drawdown was due solely to the policy mistake of not raising the debt ceiling in a timely manner,” LPL’s Barry Gilbert and Lawrence Gillum argued. “It’s likely that if Congress were to wait until the last minute again before raising or suspending the debt ceiling, equity markets would react similarly.”
What To Watch For
Though lawmakers have seemingly managed to avert a catastrophic debt default this month, it’s still unclear how Democrats will push to raise or suspend the debt limit on their own. Bank of America expects Democrats won’t ultimately use reconciliation and will instead manage to pass a debt limit increase without Republicans blocking a vote with a filibuster—a measure that McConnell blocked last month. Additionally, they say it’s possible Democrats could invoke the last-resort “nuclear option,” an emergency measure to get around a Republican filibuster and pass an increase with a simple majority.
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