The US Debt Ceiling

Presented by The PensionmarkMeridien Team, June 7, 2023

As you may know, a bipartisan debt ceiling bill was signed into law by President Biden on Saturday, June 3, two days before the June 5 “x-date” at which a breach would occur.

Given a debt ceiling breach’s disastrous impact on the economy, markets have so far seemed to cheer the bipartisan deal. But it’s worth delving further into the deal’s impacts on the global economy and certain Americans.

First, An Overview of The Deal

The bipartisan deal was formed in late May, with the House passing¹ the vote suspending the debt ceiling on June 1 and the Senate following suit² on June 2. President Biden signed³ the Fiscal Responsibility Act⁴ (FRA) into law on Saturday, June 3.

The date on which the United States would default on its debt was initially pegged by Treasury Secretary Janet Yellen as June 1, but the so-called “x-date⁵” was later revised to June 5.

Market Anticipation

U.S. equity markets cheered the progress on the debt bill while the legislation moved through Congress. Sensing the deal was near, the Dow had its best day since January⁶ on June 2, while the Nasdaq booked its sixth straight positive week, and the S&P 500 had its highest weekly close⁷ since August 2022.

Tallying the week’s major market indexes, the S&P 500 rose by 1.83%⁸, the Nasdaq 100 increased by 1.74%⁹, and the Dow Jones Industrial Average added 2.02%¹⁰.

The Bill, the Economy, and Americans

As expected, there are varying interpretations of the debt bill’s effect on Americans. So far, the consensus of most analysts seems to be that there will be a minimal effect¹¹ on Americans and the economy.

“The impacts will be negative but small,” said¹¹ Mark Zandi, chief economist at Moody’s Analytics. “When you net it all out, it’s a modest headwind to a sluggish economy, but I don’t think it’s the thing that’s going to blow the economy over into a recession.”

The major takeaway of the bill’s passage is that the U.S. has averted a default on its national debt. Without a deal reached before June 5th, various consequences would have come into play.

Kicking the Can!

Essentially, the deal “kicks the can down the road¹²,” which comes as no surprise. We have been here before, and we will be here again–next time in January of 2025, well after the next presidential election.

The original debt ceiling reached its $31.381 trillion¹³ cap on January 19th of this year. The FRA suspends the debt ceiling with no cap until January 1st, 2025¹⁴.

So mark your calendars for the debt limit to be front and center for New Year 2025!

Deficit Reduction

Through various measures in the bill, the nonpartisan Congressional Budget Office (CBO) estimates¹⁵ that it could reduce federal deficits by more than $1.5 trillion¹⁶ over the next decade.

A movement towards deficit reduction should have positive long-term effects on the U.S. economy and interest rates. If the deficit shrinks, it might suggest that the U.S. debt is becoming less risky.

Impact on Older Americans, SNAP

Medicare and Social Security have been left untouched, and that story could have been different had a deal not been reached by the deadline. However, the FRA expands job training requirements¹⁷ for SNAP benefits to individuals aged 18 to 54, affecting some older Americans.

Homeless individuals and veterans are exempt, though. As a result, the number of SNAP recipients is still expected to increase.

The deal has been characterized as a give-and-take on both sides of the aisle in many of its measures.

Student Loans Relief Changes

The FRA preserves President Biden’s loan forgiveness initiative and repayment overhaul, which is currently under review by the Supreme Court¹⁸. But the deal ends the three-year ongoing student loan pause¹⁹.

Younger Americans may have to contend with payment resumption this summer, even as prices for goods and services remain stubbornly high.

For Long-Term Investors

The overwhelming consensus thus far seems to be that the bipartisan measure featured compromise from both sides of the aisle, with no side getting more than the other. That sounds like pretty good politics! But what does it mean for investors?

Well, the passage of the FRA removes uncertainty from the marketplace. This concept could be part of the reason that U.S. equity markets reacted in a positive fashion, as it became more evident that the bill would become law ahead of the deadline. Markets love certainty and dislike uncertainty.

However, risks remain²⁰, according to some analysts.

Moving Forward

With this major hurdle cleared, markets can resume focus on the more commonplace things that matter. Plenty of factors are still in play now that the U.S. can pay its bills. U.S. equities certainly loved the anticipation²¹ of the bill’s passage.

With that said, if you have any questions or concerns regarding recent events in the financial markets, don’t hesitate to contact us.

The PensionmarkMeridien Team may be reached at 866-871-9963 or meridienteam@pensionmark.com

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Pensionmark^® Financial Group, LLC (“Pensionmark”) is an investment adviser registered under the Investment Advisers Act of 1940. Pensionmark^® is affiliated through common ownership with Pensionmark Securities, LLC (member SIPC).

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This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and they should not be considered a solicitation for the purchase or sale of any security.

Citations
1.CNBC, May 31, 2023
2. NBC News,, June 1, 2023
3. Forbes, June 3, 2023
4. Congress.gov, may 29, 2023
5. Forbes, May 26, 2023
6. CNBC, June 1, 2023
7. CNBC, May 31, 2023
8. Trading View, June 4, 2023
9. Trading View, June 4, 2023
10. Trading View, June 4, 2023
11. CNN, May 31, 2023
12. Yahoo Finance, May 31, 2023
13. CRFB.org, January 18, 2023
14. CNN, June 3, 2023
15. The Hill, May 30, 2023
16, CBO.gov, May 30, 2023
17. ABC News, June 3,2023
18. Yahoo Finance, , June 1, 2023
19. CNBC, June 4, 2023
20. Business insider, May 30, 2023
21. The National News, June 3, 2023
7. CNBC, May 31, 2023
8. Trading View, June 4, 2023
9. Trading View, June 4, 2023
10. Trading View, June 4, 2023
11. CNN, May 31, 2023
12. Yahoo Finance, May 31, 2023
13. CRFB.org, January 18, 2023
14. CNN, June 3, 2023
15. The Hill, May 30, 2023
16, CBO.gov, May 30, 2023
17. ABC News, June 3,2023
18. Yahoo Finance, , June 1, 2023
19. CNBC, June 4, 2023
20. Business insider, May 30, 2023
21. The National News, June 3, 2023