The US debt ceiling crisis seems to have been averted for now. President Joe Biden and House Speaker Kevin McCarthy arrived at a tentative agreement to extend the US debt ceiling and avoid a default that threatened to shake the global economy.
Now, all eyes will be on the decision that takes place before June 5. President Joe Biden has urged Congress to pass a deal to raise the government’s borrowing limit. Treasury Secretary Janet Yellen has warned that an extension must be finalized by June 5 to avoid a historic default that would send borrowing costs soaring.
The implication for the financial markets including stock market is huge. The Treasury will now most certainly aim to refill its depleted cash position. For that, new bills have to be issued which is anticipated to drain significant liquidity from markets. This could put pressure on markets at a time when the Federal Reserve is raising interest rates and decreasing its balance sheet.
US stock and bond markets are closed Monday for the Memorial Day holiday.
Views from top market experts
Sunil Damania, Chief Investment officer, MarketsMojo
The world market was watching the US debt ceiling negotiation with eagle eyes, as not reaching consensus could have unprecedented consequences for the world economy. Fortunately, common sense prevailed, as it did in 2011, and a compromise formula has been negotiated in which the debt ceiling limit has been suspended for 2 years. This is a huge relief for global equity and debt markets. The compromise formula will lift sentiments temporarily for investors across the world, but the market will eventually return to the fundamentals of inflation, interest rates, and other macro factors.
Sandeep Jain , MD – Trans Scan Securities (P) Ltd . and Chairman – ANMI (EIRC))
The debt ceiling determines how much money the federal government of the United States can borrow by issuing bonds. With only a few days left, US President Joe Biden and Republican leader Kevin McCarthy announced a deal to raise the debt ceiling, saving the country from default.
Just before the June 5 deadline when the Treasury thinks the government will no longer be able to pay its bills and throw the largest economy in the world into chaos, Congress will vote on the agreement to extend the government’s borrowing ability on Wednesday.
Tentatively the broad terms of the deal are that the $31.4 trillion debt cap will be suspended as per the agreement until January 2025. The government can continue borrowing money to finance itself till then. In exchange, the White House has promised to limit discretionary non-defence expenditure in 2024 to levels from 2023 and to increase it by 1% in the following year.