Republican negotiators will return to the White House to “try to finish out the negotiations” on the debt ceiling, Kevin McCarthy said on Wednesday morning, although he warned the two sides were “still far apart” on a number of issues.
The Speaker of the House’s remarks to reporters on Capitol Hill came with just over one week to go until a crucial June 1 deadline. Janet Yellen, the US Treasury secretary, has repeatedly warned lawmakers that if Congress does not raise the debt ceiling in a matter of days, the federal government risks defaulting on its obligations in early June, and as soon as June 1.
Yellen reiterated her forecast on Wednesday morning. Speaking at an event with The Wall Street Journal, she said the uncertainty over the debt ceiling was already causing “some stress in financial markets”, adding that Treasury bills coming due in early to mid June were “trading at . . . significantly higher rates”.
Investors have been avoiding bonds maturing in early June, driving the price of those securities dramatically lower. In early May, the Treasury department was forced to auction off four-week bills at the highest yield ever to entice buyers.
The stress is not limited to the debt market. Stocks have dropped this week, with the blue-chip S&P 500 and the tech-heavy Nasdaq Composite both down nearly 2 per cent.
“I think that should be a reminder of the importance of reaching a timely agreement,” Yellen said, warning there could be “substantial financial market distress” even in the run-up to an eventual agreement.
McCarthy sat down with Joe Biden on Monday for talks that the two leaders described as “productive”, after the US president cut an overseas trip to the G7 meetings short to be in Washington for debt ceiling negotiations.
But the apparent impasse in the days since has stoked concern in Washington and in financial markets over whether the two sides can reach a deal in time to avert an unprecedented default that economists warn would wreak havoc on the global economy.
Any deal struck between the White House and congressional Republicans will need to be approved by the majorities in both the House of Representatives — which Republicans control by a narrow margin — and the Senate, which Democrats control by a similarly slim amount. Both Biden and McCarthy are under increasing pressure from the left and right flanks of their parties, respectively, to reject calls for compromise.
McCarthy nevertheless insisted on Wednesday that a deal was possible — and that he could be able to shepherd it through the lower chamber of Congress.
“I think we can make progress today. I am hoping we can make progress.”
Karine Jean-Pierre, the White House press secretary, told reporters on Wednesday that a deal was still possible. “We believe that there is still an opportunity here to get to a reasonable bipartisan agreement that Republicans and Democrats in the House and the Senate can move forward with,” she said, as negotiators met on Wednesday afternoon.
The most hawkish members of McCarthy’s conference have brushed aside fears of a default and suggested the Treasury can simply prioritise debt payments.
But Yellen dismissed those claims on Wednesday: “Our payment systems have been constructed in order to pay our bills, not to decide which bills to pay and which bills not to pay.
“As a general matter, prioritisation is not really something that’s operationally feasible. And so there will be some difficult choices to make.”
In a new Brookings report, Wendy Edelberg, a senior fellow, warned of mounting costs should market stress persist as the debt ceiling stand-off drags on.
Given the Treasury market’s standing as the safest haven across the global financial system, the US government has benefited from lower borrowing costs than other countries, which Edelberg said translated to interest savings of more than $750bn over the next decade.
“If a portion of this advantage were lost by allowing the debt limit to bind, the cost to the taxpayer could be significant,” she wrote with her colleague Noadia Steinmetz-Silber.
They noted that premiums have already risen on debt set to mature in June, and should that eventually extend to all maturities, interest costs to finance the federal debt could increase by more than $4tn.
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