With the debt ceiling debate likely to dominate May-June, we will send out weekly trackers on the issue as developments occur (during the mid-week).

The Bottom Line

  • The meeting Tuesday afternoon between President Biden and the four congressional leaders from both parties was a start to the negotiating process. Nothing substantive was expected to come from it, and nothing did. While both sides reiterated their negotiating positions, we think they also walked away from the meeting knowing that they will have to make concessions soon.
  • More serious, closed-door meetings should now occur in the coming days.
  • The House’s debt ceiling extension bill passed on April 26 is a non-starter in the Senate and with President Biden.
  • At present, we don’t see any debt extension bill (including the clean extension favored by Democrats) that could pass in the Senate without a negotiated settlement.
  • A third way will have to be found.
  • A final bill will have to be bipartisan (given procedural hurdles, 60 votes will be needed in the Senate).
  • A final bill will contain only modest deficit reduction measures.
  • A final bill will not materialize until much closer to the X-date.
  • While June 1 is a soft X-date put forward by Treasury Secretary Janet Yellen, we think there is a good chance that the Secretary will need to identify a more precise X-date as June 1 approaches. We believe that date could be later in June or in July.
  • We believe a final bill will pass and become law no later than the X-date.

Next Milestones

  • More quiet and mostly staff-level negotiations mentioned above will occur.
  • There could be an announcement of a more precise X-date.
  • While congressional leaders and President Biden indicated they will meet again this Friday, any progress to be made will occur in the private meetings mentioned above. The public meetings are designed to keep pressure on the negotiators.
  • President Biden and Republican congressional leaders will continue to publicly tout their more partisan solutions as the proper course of action in an effort to position themselves more favorably with voters. However, once again, they know they will have to compromise in order to strike a deal.

Wild Cards

  • As we get closer to the X-date, adverse market reactions to a lack of progress will put pressure on negotiators to craft a deal. Unfortunately, this may be the most important and necessary catalyst for action on a deal.
  • While a resolution over the deficit reduction components in a final deal will be very difficult, equally challenging will be an agreement on the length of the debt ceiling extension. Democrats will strongly insist on an extension into late 2024 or 2025 (beyond the elections), while Republicans will push for an extension sometime next year (before the elections) to try to make further progress on deficit reduction.