Beijing, May 30 (Xinhua) -- According to a Bloomberg report on the 28th, the agreement reached by US President Joseph Biden and House Speaker Kevin McCarthy on raising the debt ceiling if approved by Congress will avoid the worst scenario of US financial collapse triggered by debt default, but it may still bring new shocks to the US economy affected by high interest rates and credit tightening.
According to US media reports, the main content of the debt ceiling agreement includes limiting federal government spending in 2024 and 2025 in exchange for a solution to the debt ceiling problem that is put on hold until early 2025. Among them, non-defense budget spending remained essentially unchanged in FY2024 (starting October 1, 2023) and increased by 1% in FY2025 (starting October 1, 2024).
This is a dollar note taken in Washington, D.C., on September 18, 2019. Photo by Xinhua News Agency reporter Liu Jie
Federal spending has helped support U.S. economic growth in recent quarters in the face of "headwinds" such as falling residential starts, and the debt ceiling deal could reduce that stimulus, according to Bloomberg.
Some economists point to the debt ceiling agreement to control spending levels in fiscal 2024, when the U.S. economy could contract. Economists previously estimated in a Bloomberg survey that the annualized GDP of the United States may decline slightly by 0.5% in the third and fourth quarters of this year.
JPMorgan Chase economist Michael Ferroli, while insisting that "the US is on track to avoid a recession," also acknowledged that if the U.S. economy enters a downward channel, "reduced fiscal spending could have a greater impact on gross domestic product and employment."
Customers shop at a supermarket in San Mateo County, California, on April 12. Xinhua News Agency (photo by Li Jianguo)
In addition to the economic outlook, federal officials need to consider the problems that the debt ceiling agreement poses for money markets and liquidity. For Federal Reserve Board policymakers, federal spending caps are a new factor to consider when making economic growth forecasts and interest rate adjustment decisions.
Diana Swank, chief economist at KPMG, believes that the debt ceiling agreement has "slightly constrained" the US government's fiscal policy, while monetary policy is already limited and may be further restricted.
This is a house for rent taken on March 14 in Washington, USA. Xinhua News Agency (Photo by Aaron)
The U.S. Treasury is now running out of cash to service its debt, and once the debt ceiling is suspended as agreed, the Treasury will need to issue and sell a large number of short-term Treasuries to allow cash to return. This "efficiently" extracts liquidity from the financial system. At the same time, the Fed is shrinking its balance sheet by $95 billion per month. These developments will be closely watched by economists in the coming weeks and months.
According to Bloomberg, in the longer term, the spending limits proposed by the debt ceiling agreement will hardly affect the "trajectory" of the US federal government's debt. The International Monetary Fund recently pointed out that if the US wants to put public debt on a clear downward trajectory by the end of the 2020s, it will need to tighten the basic budget excluding interest payments at the level of 5% of GDP, and maintaining spending levels in fiscal 2023 will not achieve this goal. (Marine)