capitol building

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

  • A second meeting involving President Biden and the four congressional leaders (from both parties) was held yesterday. Some progress was made on the organization of the negotiations, but little progress was made on the substance of a future compromise.
  • Staff negotiations, particularly between the White House and the House Speaker’s office, will now occur on a more regular basis.
  • We believe the staff discussions from the principals so far has resulted in a soft commitment to find agreement on a recission of unused Covid funds and energy infrastructure permitting reforms as the beginning of a compromise deal, but nothing specific has been agreed to with regard to both issues.
  • A third issue – spending caps on federal spending over at least the next two years – has also been discussed, but nothing has been agreed to.
  • Specific agreement on these three issues would indicate better progress, but the first two represent the low-hanging fruit of what is possible in a compromise. The harder work involving more substantive deficit reduction measures favored by House Republicans, including spending caps, remains to be addressed and will be much more difficult and time-consuming to resolve.
  • Treasury Secretary Janet Yellen on Monday reiterated an approximate X-date of June 1, though she plans to update lawmakers no later than early next week on a more precise forecast. Most lawmakers we spoke to this week expect a revised X-date to be closer to the end of June.
  • House Speaker McCarthy has said he believes a compromise bill is needed by this weekend to have a final bill voted on prior to June1; it is very, very unlikely a final bill will be completed by this weekend.
  • 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), which all of the negotiators have acknowledged.
  • A final bill will contain only modest deficit reduction measures.
  • A final bill will not materialize until much closer to the X-date.
  • We believe a final bill will pass and become law no later than the X-date.

Next Milestones

  • More quiet and private staff-level negotiations mentioned above will occur and with greater intensity.
  • There has been media speculation that conflicting schedules between the House and Senate and President Biden (he will travel to Japan later this week) could complicate negotiations. We believe this likelihood is exaggerated. The principals recognize the urgency of passing this bill and will cancel unrelated travel to deal with it, if necessary.

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.