As Air Force One departed from Knock Airport shortly after midnight last Friday night, the US president most likely saw his focus shifted towards an increasingly more pressing matter for the US government. Namely, the US debt ceiling.
In the US, the debt ceiling is a limit imposed by Congress on how much debt the Treasury Department can incur. The debt ceiling has recently become a talking point in Washington as the recent banking turmoil observed amongst America’s regional lenders see’s investors and politicians jittery over the prospects of future defaults. A standoff in Washington has ensued as the current debt limit of $31.4 trillion was hit in January of this year. If the debt limit is not raised the outcome would be a default on Treasury debt in the latter half of 2023. This would result in the inability of the US government to pay its bills such as benefit payments and put downward pressure on the US economy.
Although the writing is on the wall for Congress and both parties are aware of the consequences, the urgency of the situation is often viewed through the lens of political opportunity. Traditionally Republicans and Democrats have used this urgency as leverage over whichever party is in government. As lawmakers in the US battle it out to secure an agreement, US credit worthiness faces uncertainty.
The recent flight to safety after last month’s banking turmoil saw a surge of inflows into safer money market funds that depend on US government debt. In the short to medium term, these funds may be affected by volatility as traditionally low risk assets see uncertainty in their credit ratings. While no Washington insider may truly believe Congress will allow the US to default, the stalemate continues to drag on the credit worthiness of these funds.
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