April 25, 2023 – U.S. debt ceiling crisis

Welcome to the April 25, 2023, issue of Business News Digest by Simple Finance and Economics. The highlights of this issue: The United States debt-ceiling crisis, the political standoff, and its economic implications.

U.S. debt ceiling crisis

The debt ceiling refers to the U.S. federal borrowing limit, which reached $31.4 trillion in January 2023. The U.S. Treasury Department has been using extraordinary measures to keep the nation paying its bills, but these measures are expected to be exhausted by June or July. House Speaker Kevin McCarthy has proposed a bill to raise the debt ceiling, but the bill includes aggressive spending cuts, and this has caused an ongoing standoff between Democratic and Republican lawmakers.

Political standoff

The political standoff involves President Joe Biden and congressional Democrats, who prefer a “clean” debt ceiling increase, and House Republicans, who demand spending cuts and other conditions before supporting the increase. House Speaker Kevin McCarthy’s debt limit measure includes raising the nation’s borrowing cap by $1.5 trillion or until March 2024, capping discretionary government spending, limiting future spending growth, imposing new work requirements for social safety net programs, repealing green energy and climate-related tax credits, and boosting domestic oil and gas drilling.

Economic implications

The ongoing debt-ceiling crisis has caused distortions in the Treasury yield curve and prompted investors to seek protection in ultrashort-term Treasury bills. Short-term interest rates in the Treasury markets are experiencing an unprecedented dislocation, signaling extraordinary nervousness about the upcoming U.S. debt ceiling negotiations. If the debt ceiling is breached, the Federal Reserve may need to intervene, potentially using measures such as purchasing Treasury securities at market values, securities lending, and the use of the discount window. The outcome of the debt ceiling debate remains uncertain, and the potential consequences of a breach could have significant implications for the U.S. economy and financial markets.

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