What to know about the Debt Ceiling deal
As you may know, a bipartisan debt ceiling bill was signed into law by President Biden on Saturday, June 3, two days before the June 5 “x-date” at which a breach would occur.
Given a debt ceiling breach’s disastrous impact on the economy, markets have so far seemed to cheer the bipartisan deal. But it’s worth delving further into the deal’s impacts on the global economy and certain Americans. And that’s exactly what I’m reaching out to share with you today.
First, An Overview of The Deal
The bipartisan deal was formed in late May, with the House passing the vote suspending the debt ceiling on June 1 and the Senate following suit on June 2. President Biden signed the Fiscal Responsibility Act (FRA) into law on Saturday, June 3.
The date on which the United States would default on its debt was initially pegged by Treasury Secretary Janet Yellen as June 1, but the so-called “x-date” was later revised to June 5.
Market Anticipation
U.S. equity markets cheered the progress on the debt bill while the legislation moved through Congress. Sensing the deal was near, the Dow had its best day since January on June 2, while the Nasdaq booked its sixth straight positive week, and the S&P 500 had its highest weekly close since August 2022.
Tallying the week’s major market indexes, the S&P 500 rose by 1.83%, the Nasdaq 100 increased by 1.74%, and the Dow Jones Industrial Average added 2.02%.
The Bill, the Economy, and Americans
As expected, there are varying interpretations of the debt bill’s effect on Americans. So far, the consensus of most analysts seems to be that there will be a minimal effect on Americans and the economy.
“The impacts will be negative but small,” said Mark Zandi, chief economist at Moody’s Analytics. “When you net it all out, it’s a modest headwind to a sluggish economy, but I don’t think it’s the thing that’s going to blow the economy over into a recession.”
The major takeaway of the bill’s passage is that the U.S. has averted a default on its national debt. Without a deal reached before June 5th, various consequences would have come into play.
Kicking the Can!
Essentially, the deal “kicks the can down the road,” which comes as no surprise. We have been here before, and we will be here again–next time in January of 2025, well after the next presidential election.
The original debt ceiling reached its $31.381 trillion cap on January 19th of this year. The FRA suspends the debt ceiling with no cap until January 1st, 2025.
So mark your calendars for the debt limit to be front and center for New Year 2025!
Deficit Reduction
Through various measures in the bill, the nonpartisan Congressional Budget Office (CBO) estimates that it could reduce federal deficits by more than $1.5 trillion over the next decade. Nowhere near what we needed to more meaningfully cut into the current debt, but we kind of expect them to settle on middle of the road approaches like this.
Any movement towards deficit reduction should have positive long-term effects on the U.S. economy and interest rates. If the deficit shrinks, it might suggest that the U.S. debt is becoming less risky.
Impact on Older Americans, SNAP
Medicare and Social Security have been left untouched, and that story could have been different had a deal not been reached by the deadline. However, the FRA expands job training requirements for SNAP benefits to individuals aged 18 to 54, affecting some older Americans.
Homeless individuals and veterans are exempt, though. As a result, the number of SNAP recipients is still expected to increase.
The deal has been characterized as a give-and-take on both sides of the aisle in many of its measures.
Student Loans Relief Changes
The FRA preserves President Biden's loan forgiveness initiative and repayment overhaul, which is currently under review by the Supreme Court. But the deal ends the three-year ongoing student loan pause.
Younger Americans may have to contend with payment resumption this summer, even as prices for goods and services remain stubbornly high.
For Long-Term Investors
The general consensus seems to be that the bipartisan measure featured compromise from both sides of the aisle, with there obviously being portions on each side upset about not standing strong for or against certain components. What does it mean for investors?
Well, the passage of the FRA removes uncertainty from the marketplace. This concept could be part of the reason that U.S. equity markets reacted in a positive fashion, as it became more evident that the bill would become law ahead of the deadline. Markets love certainty and dislike uncertainty.
However, risks remain, according to some analysts.
Moving Forward
With this major hurdle cleared, markets can resume focus on the more commonplace things that impact returns. Plenty of factors are still in play now that the U.S. can pay its bills short term. While there are plenty of long-term factors that will ultimately need to be addressed. U.S. equities certainly loved the anticipation of the bill’s passage.
If you have any questions or concerns regarding recent events in the financial markets, don't hesitate to contact me. I'm always ready to chat and offer help.