I wanted to jump on today and give an update as we sit here in very early May on the latest related to the U.S. government debt ceiling dynamic. What I’m going to do today is do a recap just kind of where things stood prior to the last week or so. Then get into the latest and then get into some expectations on a go forward basis of how we might see this play out.
When did the U.S. Officially Hit the Debt Ceiling This Year?
So, recap. The U.S. Treasury, U.S. government had already hit the debt ceiling earlier this year, so hitting the ceiling is not a new thing. That’s been something that’s been known for a good number of months here. The debt ceiling was set at $31 trillion of debt outstanding. We’ve now hit that level, so the U.S. government is at the debt ceiling and that, of course, is what brought on everything that we’re going to be talking about today.
How Long Can the Government Operate Before Raising the Debt Ceiling?
The most recent projections is that without Congress authorizing an increase in the debt ceiling, that the government would be able to use what are known as extraordinary measures to be able to fund the government and finance the debt currently outstanding through somewhere between June, which is next month, and September. The projections from the government are pretty wide range of months at this point in terms of how far down the road they’re going to be able to get the running of the government from an expenditure point of view short of Congress increasing the debt ceiling.
The Latest Developments Surrounding the Debt Ceiling
Now getting into the latest, one of the first things that we know is that relatively soon we’re expecting the U.S. government to update that timeline. The timeline again being how far out into this year they think the government will be able to go without the debt ceiling being increased by use of these extraordinary measures. So we could see that that news in the next week or so potentially, and that could change that June through September timeline, tighten it up short in a number of different ways that that could go. So that’ll be probably one of the near-term notable news items that we’ll see.
House Republicans Pass a Bill to Raise the Debt Ceiling
The other thing that happened last week, we did see the House Republicans essentially pass a bill, very slim margin that did, though, authorize an increase in the debt ceiling by $1.5 trillion or by March 31st of next year. So technically, we did have an increase there, notably, though, which will segway into my next point, that increase was tied to budget decreases, essentially spending related cuts. So that means it has no chance whatsoever of passing the Senate.
As we stand here today, as we’ve seen, the Senate Democrats, Democrats in general and Biden say basically we’re looking for a clean increase of the debt ceiling. No strings attached. That’s not what got passed in the House so don’t expect that to move forward in any meaningful form. But it was at least a notable development that the House Republicans at least were able to agree on some type of framework with slim margins there.
What Can We Expect Going Forward?
So, expectations. I do see we got, again, this timeline change that’s sitting out there. Do expect whatever that timeline shows, that unfortunately we’re probably going to see this go to the very, very last moment. The U.S. government has been through this a couple of times in the past in 2011 and 2013. I think we’re far more polarized politically at this point than those times were. So expect this to go to the very, very last moment and to be likely, one of the most notable storylines, probably going to see daily reporting on this going forward kind of right there with what’s going on in the banking channel.
So, all that said, do not, though, expect that we’re actually going to see a Treasury default. Both sides, both Republicans and the Democrats, that of course, that’s not what any of us want to happen. We would all hope that would go without saying, but at least they have said that. But I do think that said, the risks here are, again, far higher than we’ve seen in past periods, even though I still expect we will see the debt ceiling get increased in advance of the actual, you know, default related events happening.
How Will the Debt Ceiling Impact My Financial Plan?
Probably goes without saying, but would not encourage any type of portfolio changes in advance of this. Again, we just don’t know how this is going to play out. There’s really no adjustments that makes sense not knowing where things are going to go. But we’ll learn a lot, I think, over the next month or so. But do expect this to be a very notable headline. A lot of reporting on the debt ceiling related issues.
So hopefully that’s some helpful context of kind of where things stand in early May here. If you have additional questions you’d like for us to tackle, feel free to reach out to your advisor and suggest those or click the link below and submit questions that way.
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Jared Kizer, CFA
Head of Investment Research
Jared Kizer evaluates findings from academic research and applies that learning to develop investment strategy recommendations. Jared collaborates daily with advisors and clients, helping investors better understand the complicated concepts that can have a tangible effect on their financial lives. Jared holds a master’s degree in finance from Washington University in St. Louis.