A decision on the potential debt ceiling increase is coming down to the wire amid the ongoing debate between United States President Joe Biden and Republican House Speaker Kevin McCarthy, leaving room for a potential to not reach a deal before the United States defaults on its debt or fails to make other payments.
President Joe Biden met with House Speaker McCarthy Monday to continue their conversation on the U.S. debt ceiling. This meeting follows their phone conversation from that previous Sunday, where they planned to meet the following day (Monday) at the White House. This conversation occurred only nine days before the U.S. Treasury Department’s projected default date of June 1.
Debate on Limit, Save, Grow Act
In April, House Speaker McCarthy brought his bill, the “Limit, Save, Grow Act,” to President Biden, proposing an increase of the U.S. $31.4 trillion debt by $1.5 trillion. However, the proposed federal borrowing limit is accompanied with a few adjustments.
The bill proposes spending reductions for federal agencies to fiscal levels in 2022 and limitation in increased spending to 1% each year. It would also revoke allocations included in the Inflation Reduction Act, like the $80 billion set for the Internal Revenue Service (IRS) over the course of the next 10 years, and a reversal of clean energy tax credits.
Where Does the Decision Stand?
While Biden and McCarthy spoke about the debt ceiling on Monday, they did not reach a decision as areas of disagreement remain. However, according to McCarthy, they both believe a deal will soon be established.
Following his Monday conversation with Biden, House Speaker McCarthy told reporters, “I felt we had a productive discussion – we don’t have an agreement yet, but I did feel the discussion was productive in areas that we have differences of opinion.”
“We’re going to have the staffs continue to get back together and work based on some of the things that we had talked about,” McCarthy continued.
Right now, White House officials are searching for ways to conserve funds and stop a default from occurring. Just last Friday, several members of the Congressional Progressive Caucus proposed to President Joe Biden in a letter that he invoke the 14th Amendment if large spending cuts are the only other options.
The statement says, "If the options are either agreeing to major cuts to domestic priorities under the Republican threat of destroying the economy and moving forward to honor America’s debts, we join prominent legal scholars, economists, former budget officials, and a former president in advocating for invoking the 14th Amendment of the Constitution."
How a Default May Affect You
A default on the U.S. debt ceiling can have a grave effect on government funded agencies, employment, interest rates, and investments, financially affecting millions of Americans.
People relying on social security, disability, and/or unemployment payments may see the effects of a default shortly after it occurs. Since government agency funding can be heavily affected by a default, payments to recipients may be delayed or even stopped. Those recipients may have to rely on their savings and/or retirement accounts. And the income received from retirement accounts may be lower as they oftentimes have a higher exposure to bonds.
While negotiations regarding the debt ceiling continue, there is a possibility of seeing volatility in government bonds, Treasury bills, and stocks. Corporate Bond investments can also be at risk during this time, and although treasury bills are historically a safer option for investors, as they are backed by the full faith and credit of the U.S. Government, a possible debt default may prevent investors from receiving some of the returns. Meanwhile, stocks may carry more risk, especially in a more volatile market caused by debt ceiling issues. Those are only a few types of the many investments potentially impacted.
To prepare for a volatile environment, reevaluating your current investments may be beneficial. With your financial advisor, you may want to look at your portfolio's equity-to-bond allocations and review its alignment with your individual investment risk profile.
If a decision on the U.S. debt ceiling isn't established, a default can occur, affecting millions of Americans. Consulting with your financial advisor to reevaluate your portfolio may be a good way to prepare for changes in the market.
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