May 22, 2023 Latest on US debt ceiling negotiations

Federal Reserve Chair Jerome Powell plans to speak at the New Democrat Coalition’s member lunch on Tuesday, a person familiar with the matter told CNN.

The meeting, first reported by Axios, comes as leaders in Washington scramble to reach a deal to raise the debt ceiling and as the Fed deliberates pausing interest rate hikes.

During his 12:30 p.m. ET meeting with the coalition in the House, Powell is expected to discuss the debt ceiling as well as high inflation and rising interest rates, the source said.

Chaired by Rep. Annie Kuster, the New Democrat Coalition describes itself as a group of nearly 100 House Democrats who are “committed to pro-economic growth, pro-innovation and fiscally responsible policies.”

The Federal Reserve did not respond to a request for comment.

Rep. Kevin Hern, who chairs the Republican Study Committee, one of the largest policy caucuses in the House conference, would not say if members will support any deal that Speaker Kevin McCarthy cuts with the White House.

Pressed if a deal could pass through the House before June 1, after Treasury Secretary Janet Yellen reiterated in a letter that it is the likely X-date for default, Hern noted that “at this juncture, we would all have to come back early,” from their scheduled Memorial Day recess next week, “and we’re all perfectly OK with that on the House side.”

He criticized Yellen for not declaring unequivocally that June 1 is the X-date. “If it's the first, then she needs to quit using language like ‘as soon as the first’ or ‘if we get to the 15 we can go to the end of the month,’ or ‘maybe it's the first to the 15th.’ She needs to define that.”

Hern accused Democrats of trying “to jam us politically” by not raising the debt ceiling in December, when they still controlled the chamber, and then refusing to negotiate earlier this year. 

Treasury Secretary Janet Yellen reiterated her warning to Congress that the nation could default on its debt obligations within a week's time.

It is "highly likely" that the agency will not be able to pay all of its bills in full and on time as soon as June 1, Yellen wrote in a letter to House Speaker Kevin McCarthy on Monday.

If the United States defaults on its debt, it would be catastrophic for the economy. Millions of jobs would be impacted, the cost of borrowing money would skyrocket and government benefits many people rely wouldn’t be sent on time.

Markets have been mostly indifferent to the debt ceiling since it was breached in January. That is bound to change as the default date, also known as the X-date, approaches.

President Joe Biden and House Speaker Kevin McCarthy are set to meet for more talks on Monday afternoon after a weekend with little progress to avoid the nation’s first default.

If lawmakers can’t reach an agreement by the last week of this month, it could get very ugly for markets.

The S&P 500 fell by more than 16% over the span of five weeks in 2011 when the United States narrowly avoided a default, which led to a downgrade of the nation’s debt. But two months after the downgrade, the S&P 500 recovered those losses and ended the year virtually unchanged.

Even if a deal isn’t reached in time and the United States defaults, it’s unlikely to go unresolved for a long stretch of time, experts told CNN. And when it does get resolved, it’s quite possible there will be a “relief rally,” said Callie Cox, eToro US investment analyst.

But there could be a correction period immediately following a deal as the Treasury replenishes the cash it burned through when it couldn’t borrow money, said Michael Reynolds, vice president of investment strategy at Glenmede.

“We have so many other pressures weighing on the economy,” she said. The US economy has spent the past year defying recession forecasts, but its luck could run out later this year, according to a new survey of business economists. Many big-box retailers’ earnings reports indicated that consumers are cutting back on non-essential purchases, a possible sign of a looming recession.

House Speaker Kevin McCarthy said Monday that the White House and House Republicans need to get a deal this week in order to avoid the nation’s first-ever default. 

McCarthy is scheduled to meet with President Joe Biden later today at 5:30 p.m. ET. Treasury Secretary Janet Yellen's "hard deadline" for the US to raise the debt ceiling. 

McCarthy defended the demands Republicans are making now on the debt ceiling, as he was pressed over why they didn’t make those spending cuts when Donald Trump was President. 

“The outcry was the speaker was different. The speaker was Nancy Pelosi,” he said.

McCarthy downplayed the possibility of a revolt among the right flank over any deal he cuts with the White House, but he didn’t say he would only put a bill on the floor if it got a majority of Republican support. Instead, he said, “I firmly believe what we’re negotiating right now, a majority of Republicans will see that it is a right place to put us on a right path.”

Where things stand: Pressed if Biden has agreed to the spending levels that Republicans have been pushing for, McCarthy replied, “Nothing is agreed to. We've had very good discussions, very professional going through. I have the highest respect for the individuals he has down here working on it." 

He would not say if work requirements for certain social safety net programs were a red line for him, but defended Republican demands to include them, saying, “every study has shown it helps people.”

“There is a number of places we've been discussing, a number of places the president discussed. That's why we're going to get together, and we're not going to cut the deal here, but we're going to work together, solve this problem and make America stronger," he said.

Wall Street is taking a no-worries attitude about the ticking time bomb in Washington that threatens to blow up the world economy. That might be a problem.

Debt ceiling-inspired selloffs have been almost nonexistent. The Nasdaq is still up by a staggering 22% on the year. And CNN's Fear and Greed Index of market sentiment is nearing "extreme greed" mode.

Perhaps this indifference is because investors have seen this drama before. They know how it ends: with politicians waiting until the last minute before giving in and finally raising the debt ceiling before disaster strikes.

No one wants to see markets panic, needlessly shrinking the 401(k) plans, nest eggs and college savings plans of millions of Americans. Unfortunately, there is a growing sense that a bit of market mayhem might be necessary.

On Friday, it looked like the White House and Republicans were getting closer to a deal on the debt ceiling before talks unexpectedly broke down.

But even news of that setback was greeted with a collective shrug on Wall Street. Stocks retreated from their highs but the Dow ended the day with a loss of just 109 points, or 0.3%. That's not exactly going to get people to call their lawmakers.

In some ways, the calm mood in markets is acting like a feedback loop. Investors are betting it'll all get taken care of. Lawmakers are in no rush because the markets are not freaking out. Rinse and repeat.

"Both political parties may need to see incremental market turmoil before settling on an agreement," said Nicholas Colas, co-founder of DataTrek Research.

Read more about this here.

House Speaker Kevin McCarthy reiterated to reporters Monday that decisions regarding raising the debt ceiling have to start being made to get a deal worked out before June 1, which is Treasury Secretary Janet Yellen's "hard deadline" for the US to raise the nation’s borrowing limit.

“We don’t like governing by deadline,” McCarthy said. Adding that the meetings, so far, have been “professional and productive.”

The optimistic tone comes after negotiations hit a snag and were put on pause Friday, and representatives of each side spent most of the next two days criticizing the other while defending their own positions.

McCarthy also said that he has been clear with President Joe Biden from the beginning about Republican priorities. “We’re not going to raise taxes. We’re going to spend less money than we spent this year," he said.

McCarthy also said that he believes that a majority of Republicans will support a negotiated deal. "I firmly believe what we're negotiating right now, a majority of Republicans will see that it is a right place to put us on a right path," he said.

McCarthy said that cutting defense spending is not on the table.

“I look at what’s happening in the world today. Look where the president just went. The G7 all focused on China. Look what the president has done with the funding, what we have voted for Ukraine. Look at our weaponry we had shipped a lot to Ukraine we’ve got to replace. I don’t think you should put America in jeopardy. So, no," he said.

He also suggested that the House could give up their planned Memorial Day recess if a deal isn’t reached. 

“Oh yeah. We’re going to stay and do our job,” he said. 

McCarthy reiterated that currently "nothing is agreed to" but there have been "good discussions" between negotiators. The top House Republican warned something has to get done "this week" to move through Congress in time. He said "it is still possible" to make the June 1 date.

Hear the exchange:

The White House and congressional Republicans have yet to reach a debt ceiling deal, and the possibility of a US default looms on the horizon.

Business owners, along with the rest of the country, are in wait-and-see mode, bracing for a possible recession and job losses in the event of a prolonged default.

While some still think a default is unlikely, the nonpartisan Congressional Budget Office (CBO) said earlier this month that there is a “significant risk” the federal government won’t be able to pay all of its obligations in the first two weeks of June. Treasury Secretary Janet Yellen warned that could happen as soon as June 1.

“We all hope that we don’t default. But hope is not a plan,” said Joshua White, assistant professor of finance at Vanderbilt’s school of management. “Companies need to have a plan.”

But there are some things businesses can do to prepare, according to experts:

Read more about this here.

Republican Rep. Patrick McHenry, one of House Speaker Kevin McCarthy’s key negotiators in the debt limit talks with the White House, told reporters that discussions are sensitive at the moment.

He would not discuss the details of the talks, including work requirements and spending caps.

"The hope is that we resolve this. It is in my interest and the American people’s interest that we resolve this. And with divided government, everyone knows that there are serious tradeoffs," McHenry said.

"I'm concerned about getting a deal that can pass the House, the Senate, and signed by the president. It's a complicated piece of math, it is," he added.

McHenry noted that there are "no" meetings planned with White House negotiators for the rest of the day. President Joe Biden and McCarthy are set to meet at 5:30 p.m. ET on Monday.