Treasury Secretary Janet Yellen is using up all of the department’s exceptional measures as the early June deadline for lawmakers to raise the debt limit approaches. Failure to negotiate a debt ceiling agreement may result in the Treasury skipping payments to Medicare, Medicaid, Social Security, and ultimately US bondholders.
The US 1-month Treasury yield has increased from its low of 3.31% last month to 5.56% due to the possibility of a debt default in mid-June.
We anticipate that these market stress indicators will worsen as the US approaches its debt ceiling, causing increased volatility in the corporate bond and equity markets and impeding businesses’ ability to raise capital and make the productive investments necessary to sustain the current [economic] expansion.
The White House cautioned that the stock market could drop 45% in the event that the US experiences a prolonged debt default, in which a default is not promptly corrected when it occurs. Based on where the index traded on May 3, this would bring the S&P 500 below 2,250.
The CEA additionally cautioned that a severe economic contraction would result in a severe recession and that millions of people would lose their jobs.
The forecasts are based on a White House simulation of possible outcomes in the event that the US made its first debt default in 246 years.
Advertisement
The stock market crashes by 45% in the third quarter of 2023, the first full quarter of the simulated debt ceiling breach, harming retirement accounts. At the same time, consumer and business confidence suffer significant losses, causing a slowdown in consumption and investment, the CEA predicted.
Even worse, in the event of a lengthy default, the government would not be able to implement fiscal stimulus programmes to boost the economy, as it did in the wake of the 2008 Great Financial Crisis and during the COVID-19 pandemic.
The CEA contrasted its research to a Moody’s simulation that predicts over 8 million job losses in the event of a lengthy default.
According to the CEA, “Federal and state governments would be hamstrung in responding to this turmoil and unable to buffer households from the impacts” if they were unable to spend on counter-cyclical measures like extended unemployment insurance.
Additionally, the CEA said that because credit card and personal loan interest rates would “skyrocket,” US households would not be able to obtain loans from the private sector.
Later today, a meeting between President Joe Biden and House Speaker Kevin McCarthy to discuss the debt ceiling is planned.