On Wednesday, the U.S. House of Representatives passed legislation suspending the debt ceiling through January 1, 2025, a move that followed weeks of negotiations by both sides of the aisle and averted a default by the U.S. government. The bill, which caps federal spending for the next two years, is anticipated to result in at least a $1 trillion reduction in federal spending over the next decade. Moreover, the bill’s passage should help reverse the sharp decline in the Treasury Department’s General Account, which has been utilized to fund the government’s obligations since the debt limit was reached in January. This reserve account, which entered the year at approximately $500 billion in size, had declined to as little as $62 billion as of May 24, the lowest level since September 2017 and a critical stabilizing factor across the economy and financial markets through the first five months of 2023.
Market Reaction
Following negotiations between President Biden and House Speaker Kevin McCarthy over the Memorial Day weekend, financial markets opened the week’s trading Tuesday morning with a generally upbeat tone, with rallies across stocks and bonds. This brief rally, however, reversed course Tuesday afternoon, as details of the bill stoked significant concern and ire by the House Freedom Caucus members. Market volatility continued on Wednesday amid other global macroeconomic news.
Next Steps
With the House’s passage of the bill on Wednesday, the next step is for a formal vote by the Senate, anticipated to occur before Monday’s expected debt default. Following the Senate’s likely approval, the legislation will move to President Biden’s desk for review and passage. While the uncertainty surrounding the debt ceiling and an unprecedented potential default by the U.S. government has garnered meaningful attention in recent months, financial market participants are likely to re-focus their sights on the ongoing banking system strains, growing recessionary warning signs, and the near-term path of the Federal Reserve monetary policy.
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